The Subprime Disaster

So the subprime mortgage crisis has turned into a world disaster. World markets plunged yesterday - trading had to be stopped on India's main exchange. How could poor lending practices be responsible for such a debacle? What sort of economic theory explains how so much money could be tied up in such low quality investments and then be lost at the first sign of a market correction that everyone knew would happen?

There was apparently a glut in investments floating around for the past few years, and it ended up in mortgages lent out to under-capitalized, poorly-informed, and inadequately vetted home buyers at the peak of a long and tiring real estate market. We put these funds in the hands of used-car salesmen turned mortgage brokers trolling for saps, turned these over to financiers who quickly bundled them up into packaged investments and sold them off before anyone had time to look into the contents. Now the entire world economy is at the brink of failure.

Again - which school of economic thought do we turn to for an explanation of all this?