So, when a lot of mortgage-backed securities were found to be close to worthless, companies that were holding a lot of them at the time, such as Northern Rock, found themselves struggling.
The problem is, large swathes of the economy rely on confidence. Banks are happy to lend to you if they are confident that you'll be able to pay it back in the future; people invest in the stock market if they're confident that their investments will increase in value; people spend money today because they're confident they'll have more money to spend tomorrow.
But when something scary happens, like a lot of people defaulting on mortgages and a burst in a housing bubble, people's confidence takes a huge dent.
Suddenly, banks don't want to lend money to you or your company, because they're unsure about the future and don't know if you'll be able to pay it back. Companies, pension funds and individuals don't invest in the stock market, as they've heard lots of scary words on the radio like "recession", "volatility", "Ponzi scheme", and "bailout". And individuals don't spend money because they're unsure about their job stability, and whether tomorrow will finally be the rainy day that they've neglected to save for, because who cares, it's summertime.
And if businesses can't borrow money, they struggle to operate properly. They can't buy new machinery, factories or equipment, they might not be able to get short-term finance to pay their employees, and their customers are running scared. They make cuts, lay people off and don't invest.
People are scared of the stock market. There's a fall in demand for shares of companies. Share prices fall.And people decide to save their money instead of spend it. They downgrade their brands at the supermarket. They hold off on that new HD TV. They stick with their old car instead of buying a new one.
All of this leads to economic contraction. And brings about a recession.
Welcome to 2009.