Simple Math

I have been trying to explain this in many ways, so now let me bring it down to my own 2+2 level. Let's say I am a worker in the U.S. and have been making $50,000 a year for several years. Back in the 90s I had a house I could afford and I was saving some money. I saved more than I spent on debt. I was in positive territory. Sure, I had a mortgage and credit cards but I was making my payments and keeping my head above water.

Now comes 2002 and forward. I am still making the same pay but my home seems to be going up in value and I am wanting something more than I have had in my life. So, due to the booming real estate market I have sold the old home for a nice profit and bought a nice new home for $500K, with next to nothing down. Not bad for a guy making $50K a year.

And now it is 2005 and my new home is still going up in value, so I take out a second mortgage to help pay the first and buy a car. This is great! And then, the bottom falls out in 2007.

Think about it. I now cannot afford to pay my mortgage, much less the second mortgage or the credit cards I have run up. Many people in my position are losing their jobs. My house's value is now toast and I could not afford it to begin with.

Thank goodness, the end is in sight; we have fiscal stimulus from the government and the banks are being saved. Everything is honky dory. If only I had a job.

Repeat story several million fold and we are done.

Disclosures: None