We used money to consume and build houses. (period) What is the problem with that? A lot of the money used for those purposes wasn't ours, it was lent, and when money that is lent is used for things that won't produce future income, there is the risk that we would reach a point where we won't have enough income or production to pay it back. And it was no different at the national level than what it was at the individual level because ultimately the national level is simply the sum of all the individual pieces.
Where was the money coming from? Well, at the individual level, it was obviously coming from financial institutions. At the national level, it was coming from private and public internationals - our capital account supported the huge deficits on our current account for a really long-time. These imbalances usually lead to a drop in the currency value or to less interested internationals in lending to that type of country... or at the individual level to banks simply not lending to the individual, but, that didn't happen.
The US is the reserve market, the reserve economy, and the dollar is the reserve currency of the world and the world has a need to "export" their way to development. So the money kept coming, also supporting the dollar. A huge imbalance was created internatoinally that led to one of the biggest bubbles in history in real estate (Residential mainly, but, also including commercial) and essentially to a bubble economy as well -> consumption (a measure of GDP) was enabled by significant borrowings / cheap credit. If those borrowings/cheap credit had not been there, then GDP would not have increased at the same rate - same for housing if the international money had not been there. This is the "conundrum" that Alan Greenspan was talking about when he was raising rates but rates for long-term borrowing was not increasing (international money kept pouring in).
The other point that I want to make has to do with employment and production. The full-time employed work-force is probably the best measure to understand the health of the economy. Those that work provide for themselves and for those that don't work (just like a one-income generating families have one person providing for all the others).
The economy is measured by the value of all the goods and services produced in a particular year, and these goods and services are generated by the full-time force. Like individual families, there are two healthy ways to consume and one unhealthy -> two healthy: from current income or savings, the unhealthy -> by borrowing. During a long-time we used the unhealthy ones - borrowed to consume and invest in non-productive assets. Its as if a corporation borrows money and then uses it to pay lavish dinners, airplanes, beautiful deks, and others -> none of these would provide the repayment methods necessary to pay the debt back.
How we get out of this mess is a totally different topic, and a very complex one - at a high level, however, we go back to the first point -> we became overlevered -> the borrowings did not go to improve our production capacity but rather to unproductive uses, and it got to a point where our productive assets could not generate enough income to pay for the debt. Something's gotta give - either the debt is reduced to sustainable levels (by production) or the production value (relative to the debt value) has to increase.
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