"Those who cannot remember the past are condemned to repeat it."

-- George Santayana

Many say that you can't use history to predict the future. But Santayana's quote rings true when it comes to market bubbles. Greed wipes away the memory of past consequences, and no one is willing to stray from the crowd when things begin to spiral out of control. And so, here we are again, in the midst of economic turmoil caused by the same mistake that investors have made time after time.

Wealth gone in the blink of an eye

With the most recent dot-com crash just six years behind us, investors do appear to have quite a short-term memory. When the equity-market collapse between 2000 and 2002 instilled a sense of fear, investors simply migrated to a new market in hopes of recouping capital in the real estate industry, which seemed resilient to becoming overvalued.

But the lovefest in housing proliferated prices, and the "guaranteed profit" seemed irresistible. Investors came armed with debt instruments, mortgage borrowers lacked credit scores, and builders such as Toll Brothers (NYSE:TOL) and Pulte Homes (NYSE:PHM) couldn't build quickly enough for the average American swiping up loads of real estate on interest-only loans from profit-hungry lenders such as Countrywide (NYSE:CFC) . Mortgages were bundled, repackaged, and bought with borrowed money. Ultimately, the wealth effect played with minds, as homeowners believed they could refinance and take out second mortgages on their rapidly appreciating houses.

Everyone was feeling rich from unrealized gains on borrowed money.

Fast-forward to the present, where the feeling of prosperity has evaporated as those unrealized gains transformed into losses. Arguably, this mess, like any other bubble, will eventually work itself out. All economic downturns ultimately bottom out, right?

But contrasted with previous recessionary periods, we've dug ourselves into a much bigger hole than before. As many economists and analysts are caught up trying to pinpoint whether current conditions meet an exact definition of a recession, nearly every characteristic of our economy strongly suggests that a prolonged period of slowness may persist for some time.

The power of debt

Beyond the fact that homeowners face mortgages worth substantially more than the market value of their property, our nation carries an astronomical debt load. And that's true if you don't even take the housing mess into consideration.

Before the 1990s, consumer debt levels grew pretty much in tandem with gross domestic product. But spending habits have since spiraled out of control, and since 1997, consumer debt has risen an average of 7.5% annually. To put that in context, if Americans had stayed on track with previous borrowing trends, we would have $3 trillion less in debt right now.

It isn't just our materialistically centered population that has sunk itself into debt. Back in 2000, the Clinton administration had racked up a record budget surplus that it used to comfortably stimulate the nation. Today, however, our government is in no shape to repair the damage we've done, as we've dug ourselves into a deep national deficit.

Life isn't cheap

Economist Robert Gordon said earlier this year that "energy is not as important a part of the consumer budget as it was in the '70s -- nor is food." But even if that's true, the cost of living is still skyrocketing. Compared with 2000, when there was virtually no inflation, we experienced a 4.1% inflation surge just seven years later. That's the highest rate we've seen in 17 years and twice the 2.6% rise in 2006. It's evident in the margins at nearly every food retailer, including Starbucks (NYSE:SBUX) , and it has pinched margins even further at consumer-goods companies such as Kraft (NYSE:KFT) . This situation puts our leaders in a bind, because the effects of stimulating the economy will push prices higher.

No quick fix

Just like the investors who never learned from previous bubbles, it seems as if our leaders haven't, either. The consistent lowering of rates is putting us right back to what got us in trouble in first place. "Free" money that encourages more spending and cheap borrowing is urging Americans to simply tack on more debt. Lower interest rates also discourage foreign investment, which has already sent the dollar on a downward plunge, so that foreign goods have become more expensive than in the past. It's a troubled market, and it seems that every "answer" leads to more questions.

What does this mean for investors?

Given the degree of leverage our economy has employed, the lack of creditworthiness of our debt, and the decisions our leaders are implementing, today's bursting bubble threatens to be much more destructive than what we've seen in recent history. Yet contrast our current situation with the disintegration of equity values we've experienced in the past, and you'll realize that the market is unlikely to collapse nearly as much, since stocks (largely, as a whole) weren't the assets that became absurdly overvalued.

Still, I think investors awaiting the bull-market rally that typically follows a downturn are going to be waiting quite a bit longer this time around, because of the degree of financial trouble we have encountered. The market will continue to be weak, but keep in mind that the declines in stock values reflect not value corrections, but a slowdown in growth expectations in the near term, while we make our way through this economic turmoil.

Our economy is plagued with troubles, and the current intervention is only creating more damage. Painful as it might be, however, we can only hope that this economic disaster will finally teach investors a powerful lesson to prevent history from repeating itself in the future. But until we learn, I'd keep my eyes open for any discounts the market may throw our way.

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