How did we get into this pickle?

If you want a good yarn on why the banks are in such a dire state I would recommend you to click on this Time article 'Why your Bank is Broke'

But if you want a brief-ish overview please read on

First off, to try and illustrate how corporate salary is not the leading cause of the economic crisis we must have some understand of how this current recession came about.

To understand the cause of the recession, we need to understand a little about the banks and the financial climate it operates.

The everyday bank has two basic functions; deposits and loans. Banks will take in deposit in which they would pay the depositor an interest, lets say of 3%. So far banks to make a profit they would use that money and lend it to someone else for a higher interest rate.

Banks used only use bank deposit to back up all the loans they gave out. Today banks operate in a very competitive financial market. Prior to the economic downturn banks would continuously try to outdo each other by offering borrowers very competitive rates. So in order to remain competitive, banks needed to continue offering borrowers cheap capital and it needed to find an alternative to bank deposits as a means of raising money to loan out.

Banks were able to raise additional capital by backing loans with their previous earnings and by issuing bonds to investors. And its these bonds that are the primary cause of most of the problems the economy faces today.