Why the economy is the way it is...

I think this article is a fascinating and enlightening analysis of our current financial situation, and why we got here. It's written by two professors from Chapman University, one a Nobelaurette.

Their fundamental hypothesis is that the current crash was/is the second consumer consumption crash:

"We propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge."

This reminds me of my earlier post where I argued that American's spending habits, which are/were clearly out of control, would be unsustainable. I hate to echo the words of my father, but he is correct when, as a child, he lectured me that personal integrity and responsibility (which he argues arise from personal morality) are the foundation of a thriving and viable society. I think he's right. We need to start educating all American's on financial responsibility--something that should probably be included as a foundational component of secondary school.

Being a graduate student at a University that severely limits your loan opportunities has taught me this as well; in addition, dealing with debt in the past, I know what a burden extra debt can be, and what a limit it can place on one's life, both physically (can't afford to do things) and mentally (stress, pressure, etc). Hopefully, the lessons learned from this downturn will be strongly ingrained in the those of us who have been through it, and we'll pass them on to our children, like what happened in the great depression, and drove the successful building of wealth for two generations. Since history tends to repeat itself (humans are all still humans), I assume after a generation or two, this will happen again...

I guess the key lesson is the importance of personal financial responsibility--budgeting, tracking expenses, saving, living within your means. All the boring stuff that makes grown-ups lame, but also able to retire and have a roof over their heads.