I have been thinking about what it was that pushed the U.S. economy over the brink, causing the real estate/mortgage bubble to burst and plunged us into the worst financial crisis since the Great Depression. History may just call this downturn the “Great Depression” as well.

 In any case, I have pondered the answer to this question. Some will say that spiraling U.S. Government debt was the cause. Others might say that the 2008 elections were the culprit. Many blame George Bush and the Republican Congress. Republicans lost control of Congress in 2006, so it is hard to lay it solely in their laps either. Certainly the bursting of the bubble was a combination of things, as was the cause of the bubble itself. However we need to look to the summer of 2007 to find the match that lit the destructive fires that culminated in the crash of 2008.

To fully understand this you must understand that the financial meltdown in the mortgage industry was due to sub-prime mortgage loans. These loans were always subprime. That is to say they didn’t meet standard FNMA/FHLMC guidelines for mortgage lending. These loans were weaker, more prone to default; below par: subprime. In most cases mortgages were made to individuals with little or no income documentation. These “no-doc” or “limited doc” loans were a license to lie. A borrower just had to assert that they earned enough money to “qualify” for the loan, whether they actually made that much or not. Income or capacity to repay the loan was suspect at the very least. In many cases the borrower could barely pay the mortgage and increased cost of maintenance on these loans and the bigger homes that they allowed to be purchased. Capacity, or the ability to repay became the problem. In times past, lenders offset this additional default liability by requiring stronger equity positions or larger down-payments for these types of loans. That cautionary set of guidelines was discarded in favor of making more loans to borrowers that really didn’t qualify.

 As long as the economy held together the largest percentage of these loans remained current. And then came the summer of 2007. I remember sitting in my office and receiving a phone call from a friend, encouraging me to leave the office and fill up my car because gas prices were spiking above $2 per gallon and some stations were already running out of fuel. What the heck!?! Within a short period of time gas prices climbed past $2 and were headed for $4/gallon. Prices went there, and stayed for quite some time. Only when oil producers started noticing a real drop in revenue from reduced consumer purchasing did the prices come down, stabilizing at nearly twice the price we had previously paid prior to the increase period. Big Oil needed a new benchmark, and $2.30/gal seemed to be a good place to set it. The U.S. economy however, was not ready for it and was, in a word, toast.

This is the point where sub-prime loans showed their weaknesses. Defaults on these loans happened like popcorn going off in a hot skillet. Borrowers already on the edge of financial failure were hammered by the one-two punch of fuel costs for their SUVs and substantial increases on nearly every other thing purchased. Americans found out fast that fuel costs drive everything. Pay attention: when energy prices go up, then the rest of the world follows. It wasn’t just that it took more to get to work or the store, it also took more to manufacture things, more to heat our homes, more to buy our food and more to run our businesses. Bankers reacted by “marking to market” their sub-prime portfolios which made even performing loans worthless on bank balance sheets. A couple of large investment banks crashed and burned, and Wall Street lost its mind. Capital dried up overnight and layoffs quickly ensued. Seemingly overnight the bow had broken and we were all in freefall . The mortgages made to people who could barely pay them were an easy target for Washington and the media. But was that really the problem? Not really. The lack of savings and real cash equity was the problem. Nobody had saved for a rainy day. With very little cash reserves, Americans had nothing to fall back on to cover for this eventuality. Energy costs proved to be our undoing. We set ourselves up and raised our chins to a knockout punch. Two years later we suffer from double-digit unemployment while Wall Street suggests we are in the middle of a recovery; a jobless recovery in which the banks and the bankers seem to be the biggest beneficiaries.

Why this history lesson you ask? Because we are on the brink of doing it again, when we have yet to recover from the last trip around the patch. Except this time, it is not some Saudi Sheikh who is preparing to nail us to the wall with drastically increased energy costs, it is our own government. Hell-bent on passing Cap and Trade energy reform legislation the government readily admits that Americans will quickly pay much more money for energy under their plans. The costs scale in over several years, but utilities will start paying more as soon as the bill is passed. They will have more taxes to pay, and increased capital outlays to reduce greenhouse emissions over a 5 year period. More costs equal greater prices to consumers. At the end of the day, consumers are the only ones that pay taxes, and they are the only ones that suffer from higher costs. Coming in the middle of a “recovery” that is jobless and likely false, Americans have no spare cash whatsoever. Should the financial markets experience a “double bounce” in 2011, coupled with lack of personal and corporate cash reserves, higher costs, and new taxes from healthcare overhaul the American economy may likely crash to a level that is unanticipated and frankly, apocalyptical. This is what is at stake for Americans right now. The camel’s back is well-bent. Let’s not break it again.