The biggest problem with the economy right now is that Americans are up to their eyeballs in debt and a hefty portion of that debt is structured unfavorably to the borrower. I am not surprised that America is drowning in debt, there is no financial education in the schools (The leftists running the public schools think commerce is evil; why would they teach children basic personal finance?), people want instant gratification (and that means taking out a loan instead of working overtime or saving for months/years), and given the immense amount of cash sloshing around the housing market until recently, many lenders simply threw basic business practices right out the window (Subprime is called that
because subprime borrowers don't pay back their loans). The lenders also were aware that they were loaning money recklessly, so they packaged loans into investment vehicles that supposedly spread the risk out, thereby controlling it. The reality is that SIVs and CDOs made asessing the risk of the underlying investments made by lenders impossible, so the rising default rates on mortgages is roiling the financial markets now as investors discover how risky their investments really are.
A friend of mine personifies the problem America has with debt: A few years ago he bought a condo after an extended period of RE price increases in my area. Since he can't see past the end of his nose, he got an ARM since the payments were lower. Later he was griping because 1) he owed $10k on his credit cards, and the minimum payments were starting to get painful and 2) Interest rates were rising, so his mortgage payments were rising as well, and 3) He had lost about 30% of the value on his condo instead of making an easy 20% return on a leveraged investment. Another friend and I advised him to get a second, part-time job, and skip vacation for a year until the cards were paid off. Well he didn't want to work 60-70 hrs a week to get rid of it, and no way was he willing to give up his annual 2 month vacation either (No, I am not kidding about that). The icing on the cake is that he would put his routine expenses like utilities, even his mortgage, on his credit card, since he had to quit his job to take that 2 month vacation. Even with no job, he would thoughtlessly drop hundreds of dollars on toys like video cameras with the credit card.
Then he decided he wanted to get married and have kids. So a good chunk of the wedding and honeymoon expenses went onto the cards too (They just hadda have a big wedding and Caribbean honeymoon.) That put him about $20k in the hole
in credit card debt alone. They had planned to go on vacation for a month later that year, but she got pregnant. Shortly after that he lost his job. Here's where it gets hard to believe (I saw it; it really did happen this way): Since the plane tickets were non-refundable, he went on vacation, with no job and a pregnant wife back home,
for a month because he didn't want to "lose" the money he borrowed to pay for them. Absolutely astounding. Naturally the delivery expenses and medical care for the infant also landed in the liability column.
AS of now he and the wife are divorcing, he is going to school and borrowing heavily to pay for it, and (as if this cake doesn't have enough icing) he only works 2-3 days a week, apparently living off of school loans. By now he owes at least twice his annual gross income (if he worked full time) in unsecured debt alone.
But when he talks about his financial problems, he never takes responsibility for it. Oh no, it is President Bush's fault that he bought property at a market high, that interest rates are rising thereby causing his ARM payments to rise too, that the credit card companies realized that he was turning into a bad credit risk and raised his credit card rates to 30%, that good jobs don't just fall into his lap, etc, etc, etc. He absolutely will not take responsibility for his situation and admit that it is almost entirely his fault that he has these problems.
So what does this long winded rant about someone's financial problems boil down to? Well, that's just one guy. One case out of millions very much like it all over America. And the government is running the national finances in more or less the same fashion. The world financial markets are watching, and I bet they're nervous. If they aren't, they should be.