I find the recent financial trouble really fascinating, partly because so much of it was predictable, and partly because I'm not certain that it was avoidable.

Let's rewind the clock. IIRC, in 2000-2001 we had the dot-com crash and its various effects on the economy, but there was a relatively fast recovery, partly due to low interest rates. Low interest rates in and of themselves didn't directly affect consumers' habits, but they did have a powerful indirect effect in the form of easy credit.

This easy credit prompted the poor and lower middle classes to overextend themselves. They took the opportunity to buy consumer products they couldn't technically afford, in the form of new cars, electronics, furnishings, etc., and that in turn caused a brief period of economic boom.

But, one of the interesting things about the poor and lower middle classes is -- despite another article on HN this morning -- they're always on the lookout for a way out of their situation. Especially anything that looks like a "cheap" solution.

The housing market. The combination of cheap credit -- with lenders practically falling over themselves to hand out loans to individuals that didn't qualify on paper for the loans -- along with the mentality of the lower socio-economic classes that housing was suddenly "a good investment" -- because prices were going up, up, up and nobody at the time believed they could ever fall -- caused a housing gold rush.

In places like the Bay Area, a lot of the available land for new housing is party far removed from everything else. This is the classic suburban housing model, and it's also going to be factor.

Because, things actually were going pretty great for about a year or two. If your credit was shaky for any reason, you couldn't afford to move or buy a house, but hey, everyone else is happy. And, remarkably, the price of basic goods and services didn't seem to change much during that period -- just the price of housing, which exploded.

And then, in a perceptibly short period of about a year or so, gas prices went through the roof. (I still don't understand why that happened, but it was timed nicely with the war in Iraq.)

What happens if you're running down a hill as fast as you can, and then you try to make a slight course correction? There's a pretty good chance that you eat pavement, and that's what started to happen.

The over-extended poor and lower middle classes had by this time used much of their available credit, and they were doing fine, unless the day-to-day cost of living changed much. Thing is, many of them had nice homes that were a 30 minute commute from work, and many of them had nice, huge vehicles. Both of those turned into the perfect storm of a price sensitivity on gas.

The first stumble happened in the car market. The distinctly American SUV, which had been considered invincible, suddenly started to see a slow-down in sales. A slow-down of anything in a bubble economy makes people nervous, but there didn't seem to be a very noticeable reaction from any major groups.

But, the price of gas stayed fairly relentlessly high, and significant numbers of people started to fall slightly behind on their credit card payments. This led to effect number 2: a very slight downward change in consumer spending.

The really neat effect though was on housing. Seemingly overnight, nobody wanted to move farther away from work. Houses started to stay on the market longer, but the prices didn't drop, at first. Thing is, too many of the people trying to sell were doing so because they themselves were overextended in credit, and they were trying to get some of that free equity out of their home that everyone had promised them.

Realtors at the time were still naively optimistic though, so they -- nearly to a one -- encouraged their sellers to stick to their price and wait it out.

The net effect was precisely what most people had considered impossible: the housing market stalled, and then crashed.

The lower socio-economic classes by now were really beat up financially, so even when the price of gas fell again, they just weren't spending money anymore. A huge number of people got soaked on their home purchases, seeing decades of savings evaporate seemingly overnight.

The big financiers and creditors then ran into trouble, and we all know the rest.

I think that the price of gas was the metaphorical straw that broke our economy's back, but I also think that the trends at the time were totally unsustainable and doomed to failure eventually. I also see how people are so willing to blame low interest rates and cheap credit (two sides of the same coin), but the thing is, those also resulted in the rapid growth of economy. What few people want to admit is that a healthy modern economy absolutely depends on the lower socio-economic classes spending money; the more they spend, the better off everyone else is. Maybe someday our economy won't work that way, but for now, it does.

Without those low interest rates, it's just as likely that we would have seen a long period of stagnation coming out of the dot-com crash. Whether that would have been intrinsically better or worse for us is way over my head.