I am a bit short on time so I can't be as detailed now as you ask, but here's my take.
Can someone explain to me what exactly happened to the world economy?
What's happening is a severe recession. These happen quite often but this one is much worse than usual because a lot of things came together at once.
How did this meltdown happen?
This started long ago. Some people say decades, I think it probably only goes back to around 2000. If you remember the late 90's were a very prosperous time, mostly due to the rapid spread and advancement of information technology and cheap resources (remember oil was dirt cheap at this time).
However, as always happens with bubbles, people got carried away, and eventually the dot com bubble burst. This was bad enough on its own, but on top of that, lame duck Bush came into power. On top of that, 9/11 dealt a serious blow to the already weak economy.
As a desperate measure to stimulate the economy, then Fed Chairman Greenspan took interest rates to a very low level, and kept them there for much longer than usual.
The low interest rates, combined with a culture of instant gratification, combined with all the attention of using real estate as an investment (Remember how much attention STR8UP's thread got?) combined to create a lot of demand and kick start the economy at least with the illusion of growth. Unfortunately all that was really happening was people were living on money they didn't have, which boosts the economy with consumer spending, but obviously isn't sustainable long term. The RE bubble, caused by the factors above and also shady lending practices, helped fuel this as people began using their homes as ATMs, taking out home equity for use on consumer spending (****ING STUPID).
Because the economy wasn't actually doing that great organically, and as interest rates started coming back up, many people couldn't afford their insane mortgages and started defaulting, but while house prices were still rising, this wasn't really a problem. Banks would foreclose on the home, then resell it for a profit since it has gone up 20% from the time the person took the mortgage until they lost their house.
Then, one day the housing bubble popped, and the above no longer worked. As prices started dropping quickly, even people that could technically afford to pay the mortgage didn't want to - why pay off a loan that is more than the value of your house? This started really hurting the banks, especially since some of them had bundled mortgages together and sold them off as investment products called asset backed securities. Then banks start collapsing, people freak out, etc. After that its really just your typical panic, people spend less money because they're scared about the future, the economy tanks further because people aren't spending, and so on.
The problem is that this is worse than many previous recessions because before people and governments had savings, or at least weren't heavily in debt and could be coaxed into spending more to restore the economy. Now people and the US government were already heavily overextended going into the downturn, so there's questions about the ability to recover quickly. For example the FED has already lowered interest rates to pretty much zero. If that's not enough, they can't use that tool anymore anyway, its used up.
What are the factors involved?
To summarize, bad physical policy, way way way too much debt, and over speculation.
Where & when did it start?
Started in the USA, when is a harder question. The core of the issue started at least 8 years ago, the bubble started bursting summer 2007, and the **** really hit the fan in September this year.
Is this world economic downturn normal?
These things do happen, but this one is worse than usual because the whole world is suffering and a lot of factors came together for the perfect storm.
That was more than I was planning to write but still really just the tip of the iceberg. Do some research to find out more, too much to cover in posts.
