Standard Of Living Bubble

All around the economist's shop, the monkey chased the weasel...

Bubbles grow...then pop. That’s all good and fun for soap bubbles and bubblegum. Not so great for standard of living.

The standard of living bubble is the idea that people are living beyond their means for longer than a short-term period. It’s not sustainable, and requires going into debt. Think: credit card debt, personal debt, auto debt, and even mortgage debt.

If people are living beyond their means for an extended period of time, it’ll eventually catch up with them and collapse. All that debt adds up, and if your income isn’t rising to cover it, you’re going to find yourself in a pickle. Well, a bubble. And a pickle. Maybe bankruptcy, too.

While this could happen to anyone, generally people with good credit scores don’t end up in standard of living bubbles...you know, people with a good record of financial responsibility with debt. That means lenders are likely lending to borrowers with bad scores, maybe when they shouldn’t.

But...why? Well, ask the lenders that caused the Great Recession of 2008 that question. Long story short: they packaged a bunch of low-rate mortgages (borrowers with bad credit) into pretty packages with bows on top and pretended they were highly rated mortgages (borrowers with good credit). And they made bank doing it. And then got bailed out for doing it, too.

Borrowers, lenders, regulators...everybody sucks here. They all contributed to the "pop."