I noticed this post at Calculated Risk regarding mortgage equity withdrawals, or MEW’s, on Monday, and I’ve been meaning to link to it. If you click through there’s a nice bar graph that really illustrates just how much money is being yanked out of the economy. Here it is in words:
Equity extraction was close to $700 billion per year in 2004, 2005 and 2006, before declining to $471 billion last year and will probably be less than $100 billion in 2008.
The post goes on to sort through what this might mean, and I’ll leave those technical details to the trained economists.
But as we keep hearing how consumers used home equity to finance not just lifestyles but in many cases simply to stay afloat through health and job crises, it’s hard not to conclude there’s going to be a continuing ripple effect throughout the economy.
This would seem to add to already intense deflationary pressures, both from the housing bubble collapse and recession-related job loss. As the ripples spread nothing short of a massive government intervention to help fuel demand (as opposed to repeatedly injecting cash into failing corporations) would seem to be worthy of discussion.
Paulson is already pivoting toward nationalization of banks, so who knows? By Halloween we may be looking at the new Treasury Department Works Progress Administration.
Just sayin’.
I wonder if this is what the onset of the great depression would have been like, seen through the lens of the internet?
A trillion here, a trillion there…pretty soon you’re talking real money.
So…taxing the rich who can afford it, tariffs to stop off-shoring and labor unions caused the Great Depression. And people believe this stuff?
It’s much bigger than the slowdown in home equity borrowing, Jon.
The roots of the current crisis lie in the wealth redistribution since 1970. That was when real wages stopped going up. The American economy has grown since then, of course, but all the gains went to the asset-owning class. Labor’s share of GDP fell from 60% to below half.
If nothing else had happened, this would have frozen consumer spending at 1970 levels. But somehow, consumer spending continued to grow — at times rapidly — making GDP growth possible. How did that happen?
Several ways. First, consumers stopped saving, and spent the money they used to save. America’s saving rate is now zero. (China’s is 50% of national income; India’s is 30%.) When that source of spending money was tapped out, consumers spent their accumulated cash savings. The third step was to spend their accumulated home equity by borrowing against their homes. The fourth and final step was to sustain consumer spending by taking on unsecured (i.e., credit card) debt at high (and non-tax deductible) interest rates.
This, of course, was unsustainable. But consumers are faced with more than merely not being able to borrow in order to continue spending. They also have to pay back the money they’ve already borrowed. This a double whammy for future consumer spending. Not only is the consumer spending that came from credit gone, but the consumer spending that came from household income that now must be diverted to repaying debt also is gone.
What does this means for the economy? Because consumer spending is 70% of the economy, and because we are facing a major retrenchment in consumer spending, we are looking at a long and deep recession followed by years of little or no growth. The ugliest part of this scenario is not the sharp but fairly short recession we now face, but a decade or more of very slow growth.
Ultimately, the cure must be the reverse of the disease: If consumer spending is ever to revive, the decline of wages must be reversed. Labor’s share of GDP must grow, and capital’s share must shrink. The recent decades in which capital took the lion’s share of output were an aberration that must now end. However we get there — stronger unions, revising trade agreements, repealing tax incentives for offshoring jobs — we must expand labor’s share of the economy. If we don’t, both the American Dream and America’s growth story are at an end.
The Dow down another 4:06PM ET Change: Down 668.40 (7.22%)
Ouch!
4 Roger, there’s one real biggie you forgot to list: From the early 70’s on, more and more households in which both adults worked, and a great many people putting off having kids (or even getting paired up) to pursue their careers.
The religious right likes to bellyache about how feminism snatched women from their traditional wife-and-mother role, but in truth it’s been the siphoning of wealth to the upper classes that’s turned the women of the American middle class (along with the men) into wage slaves.
#4. I cross posted this on the hannity site, just for fun. To get their take on why the economy is going down. In Opposite land, they just called me a communist, told me it was all the democrats fault and blamed social programs.
The entire neoconservative philosophy of governence, in a nutshell:
(1.) Fuck something up.
(2.) Blame someone else.
(3.) Repeat as long as possible.
@8 And for some reason they need to be really ugly about it.
Time to get a bunch of cowboy hats like they did in Alaska , only CBC would stand for the Capitalist Bastards Club , Pass them out to Democrat and Republican politicians who just ponied up your retirement and your folks’ too , on a platter to Wall Street .
If Patty Murray & Norm Dicks are going to be passing the hat for the likes of Goldman Sachs and AIG , maybe it’s time to get in line for Universal Health Care , Rebuilding our National infrastructure , Medicare reform . Every wonder why Dem & Rep majorities all ignore the social safety net when it gets in the way of a good money making war and brokeback bankrupt bankers , where’s the outrage ?
Just why aren’t our duly elected leaders needed back at the job in this national time of crisis ? Senators and Representatives with nothing better to do than campaign for the next term . Talk about Absent With Out Leave . Word is they might show back up next month some time .
The next step will be to instill a few of those economically restrictive 3rd world / IMF relationships on the good old US of A .
This isn’t the slippery slope to socialism that the right fears . This is the path that leads to the slippery slope to National Socialism .
National Socialism
How come we couldn’t slip into the socialism that Denmark and Sweden have, that works well for all but the very wealthy?