Sound money. $1 buck plus another $1 is $2 dollars. If you have $2 dollars you have more than if you have $1 dollar and can of course purchase more things with that $2 dollars.
If someone then wants to borrow 50 cents from you, from your $2 dollars, you'll end up with $1.50. Say you loan them that 50 cents, and they offer to pay you back the next day at 75 cents. You'll then have $2.75 pending you don't spend any of that money today.
Now say you loaned out that 50 cents, and then another friend comes and loans another $1.40 from you. They tell you they'll give you $3.00 bucks tomorrow. You loan it to them, but know they'll probably not pay until a week or more, not the next day. You're left with 10 cents. 5% liquid assets at that point with the prospect of having a payout around the end of the week of $3.75 cents. Just shy of the $2.00 dollars you started with.
But now you remember you borrowed a quarter form a friend yesterday and he's now approaching you. That friend wants his 25 cents, he's got some bubble gum to buy and he's not waiting. You're over leveraged and now stuck letting your friend down, he won't be able to get his bubble gum.
You break to him the news, you only have 10 cents. So he then demands his 10 cents. He doesn't mind that you don't have the full amount, he figures he'll just take that out now and retrieve the rest later. No need to have anymore money deposited in the account than he needs right? Why prop you up because you've loaned all your money out and are left with little liquidity. Well he takes his 10 cents and you're now out of money. You've got nothing.
Another friend then approaches you and wants to borrow 50 cents since he let you borrow 50 cents a few days ago. Well, you tell him you don't have it but he could borrow it from your other friend that borrowed some money from you. He says okay.
So now we have a web of loans, no liquidity, and people owing you money, with no tangible prospect of paying up. The metaphor isn't exact, but it really is that simple. This is how the United States of America's Financial System has screwed itself, and us, the citizens of the nation.
How do we fix it? Well long term we make sure those kids of our nation don't go loaning out everything they have. The first kid that gets lashes - the United States Government for going around and requesting all the kids loan out all their money, so everyone can have their bubble gum immediately.
We also can't control the friends of the kids. We can't do this, but we can setup the monetary system so that it doesn't provide over extension like this. Property laws should dictate how these things go, and shouldn't let people default so easily. There is structure that has existed before, most based on simple common sense, that should be put in place. No need to heavily regulate, create new committees and boards that won't do anything useful, no need for continued nonsense! Just make sure that people are held accountable for what they do and the mess will clean itself up.
Bail em' out, and we've just prepped ourselves for the next utter catastrophe.