So you believe that the housing bubble was the only thing causing this current mess?
j-mac
No, but it was the main trigger that ignited the crisis. The dynamite was enormous secular rise in domestic nonfinancial debt, the interrelationship of securities with debt (mortgage-related securities, derivatives), a lack of adequate financial system capital buffer, bad risk management, financial system linkages, current account imbalances that saw a short-term rush of capital inflows that exacerbated the structural weakenesses/accelerated the rise in the housing bubble, etc. Households, the private sector, and public sector all contributed. Technology and regulation converged creating new mechanisms e.g., securitization, that while useful in and of itself, could lead to rapid debt escalation if unchecked (regulations, private sector risk management, lack of understanding of exposures, etc.).
Nonetheless, in what was largely a private sector debt crisis, the housing bubble played the leading role. Once the bubble burst, its fallout spilled over into the financial system, gradually at first, but then at an accelerating rate once financial institutions began failing 18-24 months after housing prices had begun to decline. The mortgage debt binge proved devastating as housing prices fell.
Some statistics on the overall debt binge, which continues today even as it has been tempered by household deleveraging:
For every dollar of GDP increased from 1980-2007, the following occurred with respect to various debt:
Domestic Nonfinancial debt: $2.37
Household: $1.08
Mortgage: $1.13
Now, looking at the housing bubble era, here's what happened in the 2002-07 period for the same data:
Domestic Nonfinancial debt: $4.45
Household: $2.14
Mortgage: $2.43
Moreover, the debt levels relative to GDP were as follows:
1980:
Domestic Nonfinancial debt: 142% of GDP
Household: 50% of GDP
Mortgage: 52% of GDP
2002:
Domestic Nonfinancial debt: 194% of GDP
Household: 80% of GDP
Mortgage: 78% of GDP
2007:
Domestic Nonfinancial debt: 225% of GDP
Household: 98% of GDP
Mortgage: 102% of GDP
During the 2000s, domestic nonfinancial debt rose at just over $3 for every dollar of GDP. Since the end of the recession, household deleveraging (modest but sustained) has continued with public sector debt being substituted for household debt. Domestic nonfinancial debt is rising at a still brisk but slower rate of just over $2.40 per additional dollar of GDP. However, were household deleveraging to end, the rate of increase would be running at just over $3.50 per dollar of additional GDP. Household deleveraging won't continue indefinitely. Hence, the nation remains on an unsustainable debt course. As of 2010 Q4, domestic nonfinancial debt was 244% of GDP, household debt was 90% of GDP, and mortgage debt was 92% of GDP. Prior to the housing bubble, peak mortgage debt came to approximately 67% of GDP.