The 2008 Crisis Was Due to Americans’ Reckless Consumption
A classic example of such an exploding time bomb is the housing bubble that inflated continually after the beginning of the 21st century. Until 2008, banks were tempting people to make loans even when they could not afford to repay them. They allowed applicants to buy houses with 100% funding, thus creating huge demands in the real-estate markets.
But banks did more than that. They enticed home buyers into refinancing their mortgages and taking still more loans, with their houses as collateral. At the time, the rising market value of the houses helped the banks increase consumption even more. Huge amounts of irresponsible credit flowed into the pockets of American citizens, who squandered more and more on goods and services, enjoying an irrational sensation of wealth and happiness.
Satisfaction with this lavish way of life became an economic modus operandi that was envied and emulated throughout the Western world. Accordingly, the American economy boasted impressive performances in those years due to excessive private consumption. The sensation of affluence was real and tangible, yet false, the brainchild of an economic model that had detached from reality and from realistic prices of real-estate and personal financial assets.
When the process finally exhausted itself, due to a combination of risky “financial engineering” on the part of banks and institutional investors, and speculation in the financial markets, everything ground to a halt, dragging the United States and the entire world economy into the worst financial crisis since the 1930s. In fact, we are still in the midst of the crisis now at the beginning of 2012.