However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking.
This is an incredibly important point that needs further discussion.
Above is a chart or real (inflation adjusted) median household income from the Census Bureau. Note that during this expansion income dropped and then increased but is not higher now than at the start of this expansion. Also note that while there has been an increase over the last 30 years, the increase is (roughly) $8000. In other word, it's not that big an increase.
At the same time, here is a chart of real (inflation adjusted) GDP
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Notice that real (inflation adjusted) GDP more than doubled for the years 1980 onward. That leans an interesting question: where did the money for consumer purchases come from to expand GDP?
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Household debt. The bottom line is people are spending money they don't own. But at the same time, it's understandable. While their family income isn't increasing with the nation's product, people in general want more stuff. So they borrow money to get it.
What we're going through right now is the great unwinding of the giant, 30 year debt acquisition binge we've been going through for the last 30 years. And it isn't pretty.
