First the first. The current financial meltdown is the first truly global human event.
Every country and nearly every person on the planet is to some extent
touched by this meltdown. Such a global event has never before
happened and certainly not at the current magnitude. The 1930-40 U.S.
depression was only spread to a few European and Latin American
countries, and was not a significant event for many. WWII and the Cold
War had an effect on everyone but the effect was slow and
imperceptible, not as immediate and palpable as the current financial
meltdown.
Second, there were multiple causes to the current financial meltdown. It was a perfect storm. I have written a precis of the interaction of the efforts at creating financial safety using diversification, the insurance principle, which inadvertently spread the systemic danger around the globe and the efforts at making the price of financial companies more transparent. The combination caused a systemic failure. The U.S. Treasury made the situation worse by using the wrong correction tools.
The most compelling cause was not
the failure of the housing market and sub-prime mortgages it was the
introduction in 2007 of an accounting procedure called MTM, mark-to-market.
The consequence was that the minor increase in late loan payments and the modest rise in mortgage defaults was wildly exaggerated by the number and types of instruments that were piggy-backing on the mortgage packages and because of the MTM requirement that excessive amounts of money be deducted from the profits of the financial institutions. The combination of rapidly spreading exaggerations of mortgage loan losses and the falling profits of American financial institutions created a downward stock market spiral. When the U.S. Treasury stepped in to buy financial stock, the dilution of the stock exaggerated the downward spiral.
Bank failure is automatic based on a capital ratio, most banks failed in 2008, and the Treasury tried to save the banks with cash. It would have been wiser to change the ratio, or suspend it for a year. It is not too late to do so.
Summary: the combination of global diversification of investments and the American accounting procedure introduced in 2007, mark-to-market, created a systemic global financial failure. The intervention of the U.S. Treasury made matters worse.