Hi!
I'm the HeadSurgeon, today I'm taking a break from cutting up people and is here to help you understand le financial crisis and effects with this simple-as-a-pimple guide. edit: whoops actually...its not understandable gabble...
To answer Ellen; yes! they are linked of course- you'll see why hopefully at the end of this, and i just have to add, we can all be a bit relieved as New Zealand seems to be comming out of the recession.

first we need to know some key words! Then its all KOOL from thereon, hopefully.
subprime mortgages: basically, during the years 2006-2007 or so, houses in the U.S were "subprime"- this means that the buyer only needed a small amount or none downpayment to buy a house. Thus, those who did not have the money for a house or income to actually pay the house back- were allowed a house!
Mortgage backed security: to first get into this, we have to get into asset backed security. Asset backed security is a way of debt security (which is BANK NOTES, therefore cash!) that is based on a set of assets(the assets which in this case are houses!). So, guessing you are confused- think a cashflow, and asset backed security enables more new cash to enter this flow [the flow and the stuff in the flow is debt security stuff then].
so were does mortgage backed security fit in?well- it is the asset! It is where they source the money to get into the flow! Because mortgage back securities gets the cash cause, ya know, people have to pay their mortgages, and the people earn money from interest ect, so it contributes to the cashflow, and therefore the cashflow is dependent on the mortgage payments for the cash! So, companies can invest in these mortgages to get cash from interest/from the people who brought the house but can't actually afford it for their own cashflow. In short, it is a financial product to produce money. phew. hope i didn't confuse anyone.

err, i think thats about what ya need to know, now, here's how it fits with the Financial crisis as i understand it...

so in the past few years, with the majority of houses being brought were issued with mortgages that were "subprime". People who had bad credit history/unstable income/not enough money annually to actually afford a house/you get what i mean- were encouraged to take on hefty mortgages because of the seemingly continuing rise in price houses so- "before it gets real expensive- we'll get it at the ok-expensive price right now!!" and also because...no needed or little down payment!...but then.... interest rate (i'm sure you all know what this is) increased...and the price of houses decreased. So "Oh no!" for the people who already had low credit already, and had taken on these mortgages were in trouble- since they have to pay more now with increase in interest rate, which is rather unhelpful and unthoughtful as they are already tight on cash. Also..."oh no" for those who invested- okay lets go a lil off tangent and talk about the investors.

okay...so...le financial products- the mortgage backed securities allowed many people and companies to invest in the american housemarket. Say, there is a company called "Tomworks Inc.", the company had initially borrowed money from a finance company to expand their business. When the company saw other companies investing in subprime mortgages and all the wonderful possibilities of money, the company decides to take a nice dig too to make more money by investing in some assets/subprime mortgages[property]. So, all is good and stuff, they thought they could get away...but then interest rates go up...and the house prices went down! ..and it wasn't changing...Oh noes! The price of the Companie's assets are now worth less, and on top of that...the people who brought their assets can't pay them back so they have to take the houses away/they go in foreclosure! So the company have all these houses, that are worth considerably less(and empty) and doing nothing. Not earning them money anymore. This became a big problem in the US because many companies and major banks invested in them greatly...

Also, addressing Ellen- most sub-prime mortgages are widely owned by financial companies! ;) thats why alot have closed down, their prime business is money and subprime mortgages looked like easy money- it spread like a "nasty rumour"! and remember cashflow guys! (so finance companies lending out money it loans from the bank/subprime mortgages, and the company paying the bank back with subprime mortgage money and the lenders interest from the money they borrow). Mortgage delinquincy increased (which is home-owners being delinquints and not paying their mortgage installments on time!)- and thus this ended up in foreclosure- the houses were seized :(...a-lot of houses actually, a million or so.

Right, so with this happening- as i said before many companies and major banks invested in them, they were bound to be financially in trouble. So...since this is a decline in capital (Wealth in the form of money or property owned by a person or business in this context) this put a strain on credit, especially as these companies and banks- as well as, lets not forget, the people who owned a house with a subprime mortgage-own banks(other banks for the banks...@_@, like the Central banks) money as well. This places a strain because the banks are therefore getting peanuts back (so yeh, finance companies around the world and ALOT of small businesses are closing down because banks are weary of lending money to help out these business refinance themselves back into production/ people who wish to start businesses or wish to appply for a finance will find it a hard time to since the banks are weary, and they would have set the "standards" a bit higher- those who have less money would most definately have a hard problem borrowing. And the people, who would've lost trust in the companies who have fallen (this also include people who have invested in stocks- how people buy a certain percentage of a company [to support it, as well as reap the rewards if the company begins succesful]. remember Forrest Gump investing stocks on "Apple" and he got stinkin' rich? Well vice versa that if a company actually went under. So- this also made a big hoo-ha on wall street as we know, people not wanting to buy stocks/invest (therefore companies finding it harder to support themselves as well as young companies taking off) ritey, back on track...uhm..right trust. Yeh. And then there was recession...but i'm sure you guys can see where recession fits in ;) and the government bailout plan for the big finance companies!

Summary:The financial crises came from greedy lil people who seduced buyers who could not afford houses, and then when they had to pay bigger mortgages they could not pay, and this became a problem for the greedy people since housing prices went down and thus their assets worth less. When the greedy peoples assets went into foreclosure it is exactly like "you are screwed" who would give them the money back for the assets? they were worth less and they could not turn these assets into money! So therefore, they could not pay back the banks and stuff money they owned for buying the assets. Banks not getting money back were unhappy, as were the banks who had invested in the subprime mortgages, getting no cash here and left with empty houses. So banks doesn't want to borrow money out, as they have less of it. And ect.

man. I'm really @_@. I hope this was understandable and brain friendly....even i can't bring myself to read it. Maybe i'll continue this with an effects, but i think its a tad obvious really.