This whole idea of being excited because the value of your home was rising never did make sense to me. Given that most people only sell if they are upsizing, you just end up owing much more than you would if house prices had remained stable.

The only people who really benefited were those who could afford investment properties (and were able to realise the gains by actually selling them off), or older people who were downsizing; and most of those have had to use the money earned to help their children onto the housing ladder.

As for borrowing money against your house to buy expensive gadgets - that is just bizarre.

As the author points out, so much of our recent economic prosperity has been based on the false premise that we had heaps of money to spend. It was a bizarre and dangerous form of Keynsianism: make people think they were rich so that they would spend money, thereby creating more jobs and giving people even more money to spend. Unfortunately it's all paid for by creating masses of personal debt which will eventually have to be paid back.

If you want to create real wealth, you have to create something real, not a chimera. We need proper investment in new industries such as high tech - not just live on the strength of an asset driven economic bubble as we have been for the last decade or so.

So much for Howard and Costello's 'good economic management'.

Cazza. People can borrow, and spend, however they wish. If they are idiots who overborrow then that's their problem. If someone sells or lends something to these overborrowers and then discovers the debt cannot be repaid it is, likewise, their problem.

The Costello/Howard government inherited a huge debt with a massive servicing bill (about $9 Billion per year) which was being added to that debt. Despite the China-fuelled "mining boom" only beginning in about 2002..... see Craig Emmerson's Hyatt Speech May 2008...

"In the year 2000, before the mining boom began, mining contributed 7.6 per cent of Australia's GDP and the service economy contributed 63.2 per cent of GDP. In 2007, mining contributed 6.8 per cent of GDP and the service economy 65.9 per cent of GDP."

...this horrendous situation was immediately tackled and rectified. Australia..and it's banking system now stands firm...as a result

Seeing that the H/C Govt did exactly the opposite to the irresponsible "home-equity wastrels" you mention, can you explain what you mean by doubting that the Coalition govt WERE "good economic managers'? cheers.

Punter57, you ask a fair question.

Ultimately I suppose the issue comes down to how much the government of the day was responsible for the massive increases in house prices and corresponding blow out in private debt that we saw during the Howard/Costello years.

They certainly can't be blamed for all of it - after all house prices were also rising rapidly in the UK and US, although I don't believe they ever reached the giddy heights they did here compared to income levels. But there were specific policy decisions they took that clearly exacerbated the problem.

The reduction of capital gains tax, continuation of negative gearing policies and the introduction of the first home owner's grant, all helped add fuel to the fire.

Added to this they steadfastly refused to invest in anything that would help grow the real economy, holding to an ideology that maintains the private sector will do it all. All that money Howard squandered on middle class welfare and wasted government spending could have been much better used on creating a future for the country.

Therefore, while cutting down government debt had some advantages, by creating the lie that all government debt is bad while private debt is good, they encouraged the situation we have now - an economy based on commodities and debt-fuelled consumer spending.

Mind you, I doubt that the ALP would have done much better during that time given Blair/Brown's poor showing in Britain during the same period.

Helen, I enjoyed your well-written article which captures many of the issues driving the economic crisis in the US. I have just two points of clarification:

1) Mortgage interest is tax deductible in the US on primary residences (and holiday homes) so consolidating personal debt through a home equity line or refi seemed even more attractive because interest on personal debt, car loans, and credit cards is not deductible (note: there is a limit on interest deductions for a home equity line of credit but there is no limit if the debts are rolled into a primary mortgage through a refinancing)

2) California allows people to walk away from the home with no recourse available to the bank but this option varies by state. The IRS can also tax any write-off as it is classified as a "gift" from the bank.

The supply and demand of land/housing and therefore housing price is controlled by state governments, period. Over the past 12 odd years these state governments have predominantly been labor and nimby green restraints have prevailed detrimental to price.

The real problems started occurring back in the late 80's when non-bank lenders came onto the scene.

Prior to these cowboys one had to save at least 20% of the purchase price before the banks would even consider lending money for a house.

Then along came the cowboys with thier mortage insurance, our version of the US sub prime loans and thier re-draw facilities. A very clever trap so that fools would forever be in debt.

Then of cause there is the latest debarcle, the reverse mortage.

Now, not only can you buy a house WITH NO MONEY but you can also furnish it and PAY NOTHING for years.

Fools will always be fools. It's just a pitty that we humans are the only animals on the planet that support the weak.

Now I don't mind giving a 'hand up' to anyone, but when the hand up becomes a 'hand out' then I get snakey, esspecially when the hand out gets pissed away time and time again.

I have kids working for me taking home $600 to $800 per week and saving zero.

As cole says, better start looking for an opportunity for a couple more rentals hey, there is a fire sale about to start.

Thanks guys, not only have you built the house, the driveway and established the lawns, but you have also been good enough to furnish it for us as well. Cheers