An economic boom is a time when the value consumed exceeds the value generated within an economy. In other words, there is money floating around that does not actually have a grounding in any valuable economic activity but can be used to consume value all the same (remember, money is not actually value; it’s an imprecise representation of it). The bust that invariably follows such an era is the elimination of the “negative value” that has accumulated from such a boom and a return to economic equilibrium, where money actually begins to represent value again. If I can be so bold as to rip off one of the laws of thermodynamics for my own purposes:

The overall change in the energy of a system is the change in heating – the change in work. In economics, the formulation is even simpler: profit = revenue – cost.

They are actually saying the same thing using different terms. In fact, if you used energy as a currency, these would be exactly the same law.

This time around, many people were given loans that they could not repay. These loans appear to have been used primarily to finance house purchases, which caused demand to rise and the price of a house to artificially increase. It was, of course, the sort of fake money I had just mentioned, untied to any real value because nothing significantly changed in overall productivity to match the increased consumption.

The economy, unlike the universe, is an open system. Value can be both added and removed. No significant value was added to the system, so “value revenue” was 0. The money used to purchase houses destroyed value, so “value cost” was positive. Thus, value was lost.

Because money is an imprecise measure of value, it took a while for people to notice, and thus everything appeared to be going really well.

Until it finally caught up, of course. The fall in house prices that followed was an act of balance. The pathological money was eliminated from the economy as house prices fell, thus it became tied to the actual value of the houses again. (The other solution that would have resulted in equilibrium would have been massive amounts of inflation, so this is actually preferable).

The reason why this is a disaster rippling throughout the economy is mere reliance on this fake money by both the lenders (who collected interest on it) and the borrowers (who “leveraged” it). The interest they collected was fake value too, of course. And then they invested that into other assets. And that was also fake.

When the bubble burst, this complex web of interdependencies, all built with valueless money, fell apart. That’s my take on it, anyway.

So for those who consider my frustration with inauthenticity unwarranted, consider what effect it has had on your economy. They spring from the same cause.