Economy takes a 'bedbug' turn

Have you considered lately how similar the U.S. economy is to the pesky bedbug?

A bedbug packs a remarkable amount of activity into a sliver of time — hatching, molting, biting, mating, laying hundreds of eggs and maybe even hitching a ride in some laundry before dying — all within the span of about four months. Four months can feel like a lifetime in economics too. Just look where we were back in July. The financial world seemed ascendant. The stock market was chugging along, and there were champagne toasts as the Dow Jones industrial average eclipsed 14,000 for the first time.

But today that feels like ancient history. The markets are trembling; consumer confidence is crumbling. The Dow has bounced back down to around 13,000, and the dollar has slid to a historic low against the euro. Oil prices, meanwhile, have flirted with $100 a barrel. In short, as Fed Chairman Ben Bernanke confirmed last week, the economy is deader than a 5-month-old bedbug.

So what happened?

Simply put, the immutable laws of risk kicked in and pricked the financial bubble that had been overinflated by years of financial partying. And as is so often the case when parties end, the hangover is painful. We're only beginning to face the serious and potentially long-lasting ramifications of our delusional behavior.

The truth is that much of our recent economic surge was built on a fantasy of unsustainable borrowing. Using various forms of easy credit, countless people bought houses, cars and other big-ticket items they really couldn't afford. As a result, Americans are paying off more than $10 trillion in outstanding home mortgages, up from $6.4 trillion just five years ago, and $920 billion in credit card debt, up from $750 billion.

Corporate America indulged its own frenzied shopping spree. In 2006 and 2007, companies spent a record $3.6 trillion buying different businesses. The binge, fueled by lenders eager to relax their credit terms just to get in on the lucrative acquisition game, peaked in February when a consortium of investors agreed to take over the Texas utility operator TXU Corp. for $45 billion, the biggest buyout in U.S. history.

The problem is that all this borrowing was based on the idea that the historically low interest rates engineered by former Fed Chairman Alan Greenspan could continue in perpetuity. But as our debt piled up, a rate increase was practically inevitable. It's central banking 101.