Over the past few years' easy available credit was transformed into utilized credit that backfilled lost income (reductions in real wages) for average Americans struggling to maintain a modest standard of living. With ever more lax lending standards financial institutions made credit available to an ever expanded proportion of the U.S. population incorporating longer payment terms, in ever increasing amounts that greatly exceed once prudent debt to income ratios, and from an endless range of sources. Given the dire income 'starvation' that most average Americans have been experiencing these seemingly inexhaustible lines of credit were readily acquired and used.
With the passage of time credit became a proxy for income that was never forthcoming from employers preoccupied with 'lining their own pockets' from the sweat of worker productivity increases gained from working their employee's harder and longer hours. Even low rates of inflation further dropped already declining real wages (for almost an entire decade) reducing them to the point that they were wholly inadequate to support the most basic subsistence needs of most of our citizens.
At some point a limit would be reached to the amount of debt our citizenry could take on before the servicing of our current debt load would become problematic. Wages continued to decline in a world dominated by corporations that practiced the gospel of the 'free' market. In a world brainwashed to believe that globalization accompanied by labor arbitrage practiced by greedy businesses bent upon acquiring labor at an ever cheaper wage rate was reasonable - the status quo flourished resulting in more profound credit write-offs by financial institutions using ever increasing delinquency reserves.
Nothing was beyond the purchasing power of a U.S. citizen armed with an unlimited supply of credit supplied by their favorite financial institution 'company store'. Need a house why not purchase the most exquisitely appointed modern home at the maximum allowable approved loan amount. No need to contemplate any reasonably affordable property given that at the time appreciation of real estate was seemingly guaranteed.
With this easy money available in a multitude of credit vehicles like 2nd mortgages, secured and unsecured loans and credit cards the demand for this credit sludge began to match the supply offered. When demand began to equate to the maximum supply of credit, retail prices began to move up ever so gradually in proportion to the amount of income plus increasing credit 'backfill' supporting the consumption spending of average Americans.
No single 'spark' would ignite this dry kindling into a bonfire of unsupportable credit asset wastage that would fuel (with time) the plummeting income streams being choked off by a global economy. An economy and government controlled by corporate business elite who continually reduce wage costs by outsourcing jobs or bringing in foreign workers who'll work for sometimes 1/3 of the wage rate of a U.S. citizen. In effect, it is an approach by which the business elite are able to pillage income from 95% of our nation's citizens through higher taxes and leaner wage increases. So what financial institutions (company stores) are left with are credit assets tied to creditors (difficult to identify) that are unable to support the payment of their debt obligations including mortgages on homes (depreciating at an alarming rate) all with wages 'falling like a rock' while their debt to income ratios continue to escalate.
So once again what we're left with is a nation bound to debt across its citizenry and business base. When income becomes such a rare commodity that credit is used to pay other credit obligations or used merely to provide liquid daily, weekly or monthly operating capital for businesses this is a clear indication that an economy has reached a point of severe credit addiction. All it takes once we've arrived at this credit addictive state is just a few major financial institution failures, and one to many exogenous shocks (like the retail price spike in gasoline and diesel) to push the whole abomination over the ledge into the ravine. Investors then come to the stark realization that what is backing up financial institutions is nothing more than illusory assets that are tied to creditors (both consumer and businesses) that have now become extreme credit risks. When this transpires confidence in a multitude of investment vehicles crashes.
The painful reality then becomes a choice between economic remedial action focused upon stabilizing the financial institutions that have overextended themselves by issuing now worthless credit vehicles in most cases completely untraceable to the original creditor or addressing the root cause of the problem by pumping a sustainable income stream into the real economy targeted at low to middle income citizens whose homes are being foreclosed on and who are defaulting upon their debt obligations.
At some point the question becomes what is the most sustainable rational solution to a real economy experiencing the trauma of an income crisis created through lax Laissez-faire economic policies and a contagion of greed by business executives and business board members. Why even attempt to purge worthless toxic mortgage and debt assets from the books of financial institutions when their continually declining in value due to an already inherent lack of confidence in the underlying institutions.
During the deflationary stage of the income crisis available credit is gradually reduced as a percentage of overall income necessitating retail price reductions that continue until the amount of available credit reaches a sustainable level given a known amount of governmental oversight. Why not direct funds at the heart of the problem by infusing desperately needed income into the real economy on "Main Street" in an attempt to jump start the consumption engine made up of purchasing by average Americans which fuel 2/3's of our economy's GDP. This is the only viable solution to an American problem that is now engulfing the world in a rapidly surfacing income crisis that for too long was growing unseen underneath a layer of readily available credit.
When governments purchase these toxic credit assets from financial institutions already distressed within an environment of declining confidence their only providing more capital to the same culprit financial institutions that precipitated a segment of this economic calamity. This new infusion of capital is once again lent to creditors of suspect ability to meet their obligations thus once again starting the flow of debt sludge through our economy only to exact the same problems upon the economic system once again at some future point in time.