Federal Reserve Chairman Ben Bernanke has recently admitted he was wrong to assume that the effect of the subprime mortgage crisis would be limited.

“I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke said in an article entitled “Anatomy of a Meltdown” in the December 1 issue of The New Yorker.

“The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,” he said.

The subprime crisis hit began in the summer of 2007 as adjustable rate mortgages made to subprime or bad credit borrowers started to reset at higher interest rates. Many of those homeowners were unprepared for the dramatic jump in their monthly payments and were forced into foreclosure.

As those losses started to scare off investors in the secondary mortgage market, liquidity for home loan lenders began to dry up, leaving them with little money to lend to new borrowers. Banks immediately  tightened up their credit standards, refusing to take on risky loans as they had been doing during the housing boom.

The result has meant that first-time home buyers and poor credit borrowers have had a very difficult time obtaining funding for home purchases and refinances, slowing the formerly bustling mortgage market to a halting pace.

The fallout from this slowdown has impacted even good credit home buyers and owners, restricting their home loan options and decreasing their property values as neighboring homes fall into foreclosures and subsequent disarray.

Wall Street has also felt the effects as many banks and lenders have filed for bankruptcy with the loss of capital from investors.

The Fed has reacted to the crisis by cutting their key interest rate in an attempt to stimulate more lending. It has also recently made plenty of short-term cash loans to struggling lending institutions in order to keep the supply of money in the market flowing. The impact of these controversial actions has not yet been determined but many fear that the taxpayer will end up footing the bill for all the Fed’s bailout activity.