I think the age of consumption is in the rear view mirror. The consumer is under assault on numerous fronts - the psychology of a diminishing base of disposable income is front and center. Not a good paradigm in a consumer-centric economy.
Fed to inject over 900 BILLION into market... Holy Cow.
"The Federal Reserve will provide as much as $900 billion in cash loans to squeezed banks in an urgent effort to break through a dangerous credit clog that threatens the economy and has unhinged financial markets around the globe.
The Fed's action is aimed at spurring spooked financial institutions, which are hoarding cash, to lend not only to each other but also to individuals and businesses."
MEW & Home Value are canaries in the mine, however the correlation that will really matter is unemployment to consumption to GDP. That's what needs to be calculated in order to calibrate the solution to the problem. Congress has thus far calibrated the solution so the "subrime crisis" of yesteryear and days of yore...verses the system collapse of the financial system. I know their working on the Credit Default problem now, but correlate the joblessness to consumption to GDP and that should scare them into reality.
I don't understand why people would use the MEW atm and not spend the money immediately--or pay down another higher rate loan--and then start the cycle over again. The mindset was house prices only go up--this was the atm perk of homeownership.
Damn that was a great post. I can't believe the quality of the posts on this blog considering how often it is updated. Thanks, CR. Your work is outstanding.
"Our sense ... is that consumers respond to changes in the value of their home essentially because theres a change in their wealth, not because theres a change in their access to liquid assets."
the problem now is many panicky people are questioning whether the fucking bank account is a liquid asset, forget MEW, 401k....stocks& bonds.....
This is a great point. If we just cut out the middleman broker we can go straight for the wall street type using the ATM, and just roll him/her right there and make a figurative killing and a buck...and the great part is he/she pays the ATM fee...
Bernanke is right, the $600bn annual withdrawals were not very stimulating. It was only in people's minds
But that $300bn stimulus plan, now that was stimulating. We even had to tell the BLS to add 4% to GDP through the birth/death model that is now running against unemployment and gdp
Bernanke is running out of options because he keeps defaulting to methods of flooding the market with money -- even the market doesn't like the destruction of all short term non-Federal Reserve lending
"Our sense ... is that consumers respond to changes in the value of their home essentially because theres a change in their wealth, not because theres a change in their access to liquid assets."
I see this routinely in my own behavior.
My consumption changes dramatically with the swings in my personal portfolio, even though I know it's irrational on my part.
Moreover, recently I've been cutting back on spending simply due to the psychological effect of the constant drumbeat of financial and economic doom from the airwaves.
It will be interesting to see what the chain store sales look like later this week.
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.
So equity extraction out of all homes in the US in 2004, 2005 and 2006 was running at about one bailout per year.
Economics Question: When you earn money, your choices are to save/invest it or to spend it. Which is better for the economy? If we save, that money goes to business projects that build means of production. If we spend it, the money goes to keep those means of production busy.
I usually hear about spending being so important to the economy. It seems to me, however, that saving is more important. Spending is important for GDP next quarter. Savings is important for LT structural growth in GDP. Do I have this right? Are the media just short sighted to focus on spending?
Well written article. Since there is little research complete, and the housing value decline so severe, maybe one has to look at it from a simplistic point of view: If I don't have $5 bucks at the first window at McDonald's, I ain't ordering the Big Mac, I order the $1 Double Cheeseburger from the dollar menu. The American homeowner is tapped out to the max., done with spending for some time to come. Long overdue.
Seems like you would have to analyze the spending patterns of two piles of comparable households - one that used MEW, on that didn't - to get an answer.
Does either paper do that? I started scanning the first, but even the printed words of Greenspan put me to sleep.
Just a thought: It seems that consumer psychology is pejorative, that is consumers get irrationally scared by news and act accordingly (irrationally)...but psychology is first and foremost a powerful asset, and quite frankly if you smell fire on the wind, you might want to run, and feel fear in doing so...
...it's irrational actions that we are concerned with that mass media attempts to correct and recalibrate so we all don't stampede or dive into mob mentality...but the mob can be useful, when it runs in the direction exactly opposite of the tidal wave...wow, a lot of mixed metaphors.
Quite frankly, Bernanke and company can stimulate out the ying-yang for all I care. The fact of the matter is that the average home owner is watching the news and slowly realizing that the nest egg is perhaps just a bit underfunded. Time to pull back on the spending and sock some money away for a rainy day...and perhaps...retirement.
There's a problem with consumption? Are you sure? I walked into a Volkswagen dealership after work today and might as well have been a leper.
They had someone filling out a credit application, another guy on the phone talking about shopping a loan around, and another guy BSing with a woman that was dressed too well to work at a car dealership.
Business sure must be going gangbusters if nobody even gives me a second look.
To differ, I've changed spending habits because I've watched people get their hours cut, or simply laid-off or riffed. I've seen this on the government and civilian side.
I usually hear about spending being so important to the economy. It seems to me, however, that saving is more important. Spending is important for GDP next quarter. Savings is important for LT structural growth in GDP. Do I have this right? Are the media just short sighted to focus on spending?
Charles J Gervasi
If everyone is saving their money and not spending it who will need to borrow it?
Convince someone they are poorer and in danger of becoming poorer still, does diminish their desire to spend what they have. Hording is a natural human impulse. Although Pres. Bush's encouragement to go shopping shortly after the 9/11 attacks is much criticized, it was probably the right thing to do for a panicked population suddenly shifted into a perception that things might get worse and it was time to hunker down.
The people are panicked again and if they suddenly pull back then predictions of a severe recession become self fulfilling prophecy. I will leave it to experts like the Fed Chairman to quantify this deflationary expectation, but IMO it is real and compounding the real problems of credit tightening.
I remember the problems that hording caused in the 1970's very clearly. I suspect that the perception of loss of value in one's major asset, the house, is just as serious.
I this "correction" results in a saner economic environment I welcome it. It might also have to do with the fact that I have plenty of liquid and insured deposits for a rainy day.
Why@ ZIRP writes:
Convince someone they are poorer and in danger of becoming poorer still, does diminish their desire to spend what they have. Hording is a natural human impulse. Although Pres. Bush's encouragement to go shopping shortly after the 9/11 attacks is much criticized, it was probably the right thing to do for a panicked population suddenly shifted into a perception that things might get worse and it was time to hunker down.
He could have played down the fear aspect--given a Churchill like speech--fearing fear itself was used as a political gift by him--disgusting.
Gervasi - The balance between savings and consumption would make sense in a free market (ie, market interest rates, no govt subsidies) but since we only pretend to have free markets in the US your observation might seem puzzling. Artificially low interetest rates or govt subsidies will always send misleadnig signals to consumers and producers alike.
Where the info and anlaysis breaks down is the purpose to which MEW is put. The assumption is always on consumption and non-productive purposes. However, some, given lag effects, could be to previously-deemed ok ROI ventures, like home reno or expansion, which have now been undone by property asset price collapse. Net result is the same - more debt for no greater value.
But I propose an even more worrying substitution effect in the casino: MEW at historic low rates used to shore up credit card, auto loan, student loan, and other repayment minima to defray the day of reckoning. I have searched for this data and cannot find it. That is, MEW is the trust fund to keep from triggering universal default in a range of other household balance sheet credit classes. If anyone thinks this is remotely plausible, have a go at filling in the charts.
Why do I think this is possible? Because I did something similar myself, and it was doomed - only a very fortunate job change altered the deathspiral.
If there's any validity to my hunch, then the stock of the problem turns rapidly to a flow problem in the near term, with resets all over the place, and household meltdown.
gervasi - you need both savings and consumption to grow an economy. Think of the best way to spend your 50 on cannabis. You smoke some, then plant some seeds for future harvests. If everyone just smoked everything, there'd be nothing for the future.
Oh the other hand, if everyone just grew their own, there'd be very few sales to add up.
gervasi the old consume vs. invest conflict is as old as dirt... think of it like a pipeline... if you don't consume anything why build the pipeline to transport the 'anything'?
On the other hand if you don't save (divert would be consumption to investment in say a 'pipeline') how will you allocate resources to build the pipeline to eventually consume?
The power of 'efficiency' is that it allows you to invest less to be able to consume more... a bucket brigade costs about as much in human resources as a pipeline but delivers a lot less stuff.
There has to be a balance & we've been skewed away from investment and toward consumption for far too long - payback will be hell.
We are on the cusp of seeing what all the green propaganda is really all aout: making a virtue out of the necessity of building a sustainable economy instead of one built on growth.
This need not be a negative if the idle rich at the top of the wealth pyramid allow the natural price deflation of capitalism's exploitation of technology to increase real wealth for the worker bees.
If they insist on offsetting that wealth effect through taxation and confiscation of savings through inflation then we can start this whole sordid cycle over again.
The traditional wealth effect, that Bernanke subscribes to, is based on a single-equation model of PCE. Becauase PCE is 2/3 of real GDP, the PCE equation obviously is nonsense. For example, the exogeneity assumptions underlying the parameter estimates are preposterous. Why do people who use parameter estimates from equations of this sort not at least offer caveats?
MEW is a measure of what people actually extract, and, to the extent that it is accurate, it is a much better starting point for estimating GDP or PCE effects.
Not only do we lose the consumption generated by the loans, we need to deduct the impact of future payments on the loan. Some are projecting a big stock rebound but lower earnings reports and little issues such as the chart in this post would lead one to believe that we are so totally screwed that a serious rebound is unlikely.
Very odd that Bernanke clings to the traditional wealth effect argument. It is obvious that if people can more easily tap into to their wealth, they will use it more often. Forty years ago, home equity primarily affected PCE only through the traditional channel of unrealized gains (there were few home equity loans or cash out refinancings). However during the past 20 years or so people have been able to easily tap into housing wealth in various ways, which clearly has accentuated the traditional wealth effect. Why does Bernanke igonore this? Is it because he is still wedded to textbook economics, which are twenty years out of date?
October 6, 2008 - LOS ANGELES - An unemployed man with an advanced finance degree who was despondent over his own financial problems shot and killed his wife, three children, mother-in-law and then himself in an upscale home in a gated community, police said Monday. Officers found the bodies Monday morning after the wife failed to show up at a neighbor's home to go to work, Deputy Chief Michel Moore said. The deaths occurred sometime after Saturday evening.
mean while in other news
October 6, 2008 - WASHINGTON (Reuters) - Lehman Brothers Inc. Chairman and Chief Executive Richard Fuld received compensation valued at $22.1 million in 2007, a year in which the company weathered the subprime mortgage collapse better than its rivals. Apart from his 2007 compensation, Fuld realized about $40.3 million from exercising stock options and $26.5 million from vesting stock awards.
Great article on a topic of current interest. However, focusing on estimating the marginal propensity to consume (MPC) out of housing wealth is a bad idea!
I do not buy that only 50% of MEW was consumed. What happened to the other 50%? Households have been selling financial assets, so it could not be saved and I doubt it was donated to charity. Let us face it. Almost 100% of MEW is consumed (including housing consumption)...
. However during the past 20 years or so people have been able to easily tap into housing wealth in various ways
They haven't been tapping into housing "wealth" at all, just borrowing against expected capital gains, which is the whole problem.
Wealth is the ability to buy or produce real goods and services. Not paper asset prices. If everyone's house price doubles, the country is not wealthier. There is nobody to sell the houses to.
Anyone see that article about Fuld being punched in the face and knocked out in the Lehman gym? I wonder if we'll see more violence against execs in the coming months.
Anecdotal evidence is colored by our perspective and our expectations. Does it mean anything? Probably not. Anecdotes are little stories, and we humans love little tales about ourselves and our little lives.
That said, south lake tahoe retail is getting hammered and retail shops at the "y" are almost all closed up now. The rocky mountain chocolate factory last day of biz was yesterday. I bought a couple of caramel apples for $5 each and talked to the owner for awhile. He is closing his shop in squaw valley too. He tells me a friend told him that 1000 restaurants have closed in Sac over the past year. He has had his stores for 16 some years and never had a summer as bad as this, he tells me.
In that same shopping center there is a little store with modern looking womens clothes called styles. Prices are between 5 and 10 bucks for EVERYTHING. Salesgirl says they are doing fine. Store was pretty busy. Girlfriend liked some panties and a silver butterfly ring. Cost me 15 bucks. Happy girlfriend: priceless.
Then had to go to SF. Stopped in at Fairfield Chevrolet to look at Tahoes. The GM employee discount is over but they have a 0% 72 months deal. They offered me a loaded tahoe for 46k out the door at that 0% rate. I was the only shopper in on a nice sunday afternoon. They said they sold a lot of trucks and tahoes during the discount sale, which just ended. They told me they would do whatever it took to get me to buy the tahoe. I said I wasn't in any hurry. They gave me a bottle of water cuz I had a headache after driving all that way from the lake.
I didnt buy the tahoe. The girlfriend liked it though...
To me it borders on absurd to argue that home equity extraction is less important than the "wealth effect" that Bernanke is talking about. People had HELOC cards that they could take to the mall! When home prices were ballooning upward, people refied over and over to take out the equity. Some spent it at the mall, some spent it on remodels, some plowed the cash into their small business--but they all spent it. That was the point of the exercise. And now their home values are dropping, they are underwater, and if they have some kind of personal reversal (sickness, divorce etc.) they default.
Now all that is over, as the chart indicates so dramatically. And that drop from $700 billion in extraction to $less than $100 billion in two years is awesome indeed. That's $600 billion less economic activity. Look out below.
You would still have equity extraction if house prices hadnt fallen to the point where equity lines have been frozen and new equity lines are only a teaser on a blackboard in a bank lobby.
I am with yoghurt, I think 100% of MEW was 'spent', it had to go somewhere and be used for something. No point drawing down and letting it sit in a cheque account.
MEW passed through hands who all clipped the ticket somehow. That little gravy train has left the station...
Well, if we believe the graph, homeowners are not taking out 200$ billion a year - I assume they were actually spending the money (I sure as hell hope they weren't putting it into WM, Lehman, or Bear Stearns and have at least a granite countertop and some stainless steel appliances).
I would say they are spending less and are worth less.
DOW 6,000
It's unfortunate my post questioning the merits of higher consumer spending was deleted. Thank you Shnaps and dryfly for answering. You guys seem to agree that if lower MEW meanings less spending, that's okay. Spending isn't fundamentally better than its alternative, saving.
I never have been a spender.
I'd rather save most of what I make and let other 'consumers':
spend borrowed money
to buy crap they don't need
so CEO's can keep making millions
...
The drawback is that I end up paying for other people's irresposible behavior.
At least I still have my savings ...
Gents -
Taking the average MEW rate as about $700 billion/year in years 2004-2006, an assumption that all the MEW money was spent on consumption, and an M2 money velocity of 2, and a GPD of about $14 Trillion... we could estimate MEW financed to about 10% of GDP in the years 2004-2006. Since MEW has gone essentially to zero, we could conclude that we have lost about 10% of GDP in the last two years. The magnitude of this loss has not shown up in BEA GDP estimates. WHAT GIVES?
"Economics Question: When you earn money, your choices are to save/invest it or to spend it. Which is better for the economy? If we save, that money goes to business projects that build means of production. If we spend it, the money goes to keep those means of production busy."
What you fail to see in this argument is that the money you spend ends up in the bank accounts of the people you buy from. Then that cash can be used to build the "pipelines" to get the product where you need. Spending is good for the overall economy, but bad for the individual - and we now have a lot of individuals in trouble.
First?
Yay...
Well done.
Now that's the CR I remember...
Just wait for next year...
R2K
Are you a commie?
I think the age of consumption is in the rear view mirror. The consumer is under assault on numerous fronts - the psychology of a diminishing base of disposable income is front and center. Not a good paradigm in a consumer-centric economy.
Fed to inject over 900 BILLION into market... Holy Cow.
"The Federal Reserve will provide as much as $900 billion in cash loans to squeezed banks in an urgent effort to break through a dangerous credit clog that threatens the economy and has unhinged financial markets around the globe.
The Fed's action is aimed at spurring spooked financial institutions, which are hoarding cash, to lend not only to each other but also to individuals and businesses."
MEW is a better proxy than home prices since it reflects both HPA and credit availability.
Of course, we have neither at the moment.
CR,
MEW & Home Value are canaries in the mine, however the correlation that will really matter is unemployment to consumption to GDP. That's what needs to be calculated in order to calibrate the solution to the problem. Congress has thus far calibrated the solution so the "subrime crisis" of yesteryear and days of yore...verses the system collapse of the financial system. I know their working on the Credit Default problem now, but correlate the joblessness to consumption to GDP and that should scare them into reality.
One can only hope. Great post.
Thanks.
BH
I don't understand why people would use the MEW atm and not spend the money immediately--or pay down another higher rate loan--and then start the cycle over again. The mindset was house prices only go up--this was the atm perk of homeownership.
system systemic somebody knows what I mean.
Damn that was a great post. I can't believe the quality of the posts on this blog considering how often it is updated. Thanks, CR. Your work is outstanding.
Just Buy It !
Accumulate !
Consume like there's no tomorrow !
You Need Another One !
Throw out that old one, and get the new version !
Update/Upgrade !
When Your Needs are Wants ( and vice versa)
I love a good advert slogan. It clears the mind, and decreases anxiety. Sets the mood for the killing floor...,
In addition to home values, we have to consider the effect the recent mild decline in stock prices will have on consumption.
Bernanke quote about liwquid assets..
"Our sense ... is that consumers respond to changes in the value of their home essentially because theres a change in their wealth, not because theres a change in their access to liquid assets."
the problem now is many panicky people are questioning whether the fucking bank account is a liquid asset, forget MEW, 401k....stocks& bonds.....
sorry for the extra DUBYA
How are people going to afford their mortgage without MEW?
Mel,
This is a great point. If we just cut out the middleman broker we can go straight for the wall street type using the ATM, and just roll him/her right there and make a figurative killing and a buck...and the great part is he/she pays the ATM fee...
Bernanke is right, the $600bn annual withdrawals were not very stimulating. It was only in people's minds
But that $300bn stimulus plan, now that was stimulating. We even had to tell the BLS to add 4% to GDP through the birth/death model that is now running against unemployment and gdp
Bernanke is running out of options because he keeps defaulting to methods of flooding the market with money -- even the market doesn't like the destruction of all short term non-Federal Reserve lending
--
According a graph of US GDP growth excluding MEW the US economy would have been in depression since 2001.
What Housing Bubble (MEW included) giveth it taketh back. Hence, depression is a normal outcome. I am hoping that CR will warm up to the idea.
Jas
"Alex, I'll take Iceland for $200"
"You bought it, sucka"
"Our sense ... is that consumers respond to changes in the value of their home essentially because theres a change in their wealth, not because theres a change in their access to liquid assets."
I see this routinely in my own behavior.
My consumption changes dramatically with the swings in my personal portfolio, even though I know it's irrational on my part.
Moreover, recently I've been cutting back on spending simply due to the psychological effect of the constant drumbeat of financial and economic doom from the airwaves.
It will be interesting to see what the chain store sales look like later this week.
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.
So equity extraction out of all homes in the US in 2004, 2005 and 2006 was running at about one bailout per year.
Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut
Fed Sets Floor Below Rate Target, Engineering `Stealth' Cut - Bloomberg.com
Guess what folks, Bernanke has screwed up big time.
He is the cause of this credit market freezing up
Lending at lower later via TAF TSLF etc has made things much worse
The rumour is around that he will scrap the plans and bring out something even worse ..like ULP
Unsecured Loan Package
Economics Question: When you earn money, your choices are to save/invest it or to spend it. Which is better for the economy? If we save, that money goes to business projects that build means of production. If we spend it, the money goes to keep those means of production busy.
I usually hear about spending being so important to the economy. It seems to me, however, that saving is more important. Spending is important for GDP next quarter. Savings is important for LT structural growth in GDP. Do I have this right? Are the media just short sighted to focus on spending?
Well written article. Since there is little research complete, and the housing value decline so severe, maybe one has to look at it from a simplistic point of view: If I don't have $5 bucks at the first window at McDonald's, I ain't ordering the Big Mac, I order the $1 Double Cheeseburger from the dollar menu. The American homeowner is tapped out to the max., done with spending for some time to come. Long overdue.
Seems like you would have to analyze the spending patterns of two piles of comparable households - one that used MEW, on that didn't - to get an answer.
Does either paper do that? I started scanning the first, but even the printed words of Greenspan put me to sleep.
Just a thought: It seems that consumer psychology is pejorative, that is consumers get irrationally scared by news and act accordingly (irrationally)...but psychology is first and foremost a powerful asset, and quite frankly if you smell fire on the wind, you might want to run, and feel fear in doing so...
...it's irrational actions that we are concerned with that mass media attempts to correct and recalibrate so we all don't stampede or dive into mob mentality...but the mob can be useful, when it runs in the direction exactly opposite of the tidal wave...wow, a lot of mixed metaphors.
..bartender...mix me...never mind.
Quite frankly, Bernanke and company can stimulate out the ying-yang for all I care. The fact of the matter is that the average home owner is watching the news and slowly realizing that the nest egg is perhaps just a bit underfunded. Time to pull back on the spending and sock some money away for a rainy day...and perhaps...retirement.
There's a problem with consumption? Are you sure? I walked into a Volkswagen dealership after work today and might as well have been a leper.
They had someone filling out a credit application, another guy on the phone talking about shopping a loan around, and another guy BSing with a woman that was dressed too well to work at a car dealership.
Business sure must be going gangbusters if nobody even gives me a second look.
o,Frued, Sheila Bair along with FDIC and OTS with the confiscation of property rights in the seizure of WaMu is why we are here right now.
Unsecured creditors do not feel safe, why do you think FED is going unsecured in this environment?
Well, the operation to hold back the tide is now well underway.
This massive effort will most likely succeed for a while, and once again it will fade as reality begins to intrude.
I am waiting for the dollar to start falling- that is the canary in the coal mine.
As for Wall Street- we are about to get a ripping large rally as once again the powers strip the shorts of their massive profits.
The most obvious course is the most cynical.
As for consumption, well in real terms of goods consumed, it will fall, and eventually prices will rise, especially prices of anything imported.
Someday this war's gonna end...
In addition to home values, we have to consider the effect the recent mild decline in stock prices will have on consumption.
ac
Wait till they hear their pensions are in serious trouble!
........
ac,
To differ, I've changed spending habits because I've watched people get their hours cut, or simply laid-off or riffed. I've seen this on the government and civilian side.
I usually hear about spending being so important to the economy. It seems to me, however, that saving is more important. Spending is important for GDP next quarter. Savings is important for LT structural growth in GDP. Do I have this right? Are the media just short sighted to focus on spending?
Charles J Gervasi
If everyone is saving their money and not spending it who will need to borrow it?
Convince someone they are poorer and in danger of becoming poorer still, does diminish their desire to spend what they have. Hording is a natural human impulse. Although Pres. Bush's encouragement to go shopping shortly after the 9/11 attacks is much criticized, it was probably the right thing to do for a panicked population suddenly shifted into a perception that things might get worse and it was time to hunker down.
The people are panicked again and if they suddenly pull back then predictions of a severe recession become self fulfilling prophecy. I will leave it to experts like the Fed Chairman to quantify this deflationary expectation, but IMO it is real and compounding the real problems of credit tightening.
I remember the problems that hording caused in the 1970's very clearly. I suspect that the perception of loss of value in one's major asset, the house, is just as serious.
New thread.
If everyone is saving their money and not spending it who will need to borrow it?
Holy crapola! Are you suggesting a savings rate on the positive side of the x-axis?
I this "correction" results in a saner economic environment I welcome it. It might also have to do with the fact that I have plenty of liquid and insured deposits for a rainy day.
Why@zirp,
No recessions are self-fulfilling prophecies. None of them.
Not one.
That is all.
and you can all forget about earnings. Earnings is the next bubble getting popped.
its meet or exceed top line, coupled with disaster guidance.
psycholgy is still driving the analysts too...
Why@ ZIRP writes:
Convince someone they are poorer and in danger of becoming poorer still, does diminish their desire to spend what they have. Hording is a natural human impulse. Although Pres. Bush's encouragement to go shopping shortly after the 9/11 attacks is much criticized, it was probably the right thing to do for a panicked population suddenly shifted into a perception that things might get worse and it was time to hunker down.
He could have played down the fear aspect--given a Churchill like speech--fearing fear itself was used as a political gift by him--disgusting.
Gervasi - The balance between savings and consumption would make sense in a free market (ie, market interest rates, no govt subsidies) but since we only pretend to have free markets in the US your observation might seem puzzling. Artificially low interetest rates or govt subsidies will always send misleadnig signals to consumers and producers alike.
Holy crapola! Are you suggesting a savings rate on the positive side of the x-axis?
theyieldcurve
LOL ! ! !!
Japanese Market recovering from lows, now contained to only 3% down a day.
Finally there are some good private equity deals to be had.
Anybody who could answer that would not only get the Nobel Prize but I think they would retire the thing.
Suitably gothic thread music:
YouTube - SPK - In Flagrante Delicto
Where the info and anlaysis breaks down is the purpose to which MEW is put. The assumption is always on consumption and non-productive purposes. However, some, given lag effects, could be to previously-deemed ok ROI ventures, like home reno or expansion, which have now been undone by property asset price collapse. Net result is the same - more debt for no greater value.
But I propose an even more worrying substitution effect in the casino: MEW at historic low rates used to shore up credit card, auto loan, student loan, and other repayment minima to defray the day of reckoning. I have searched for this data and cannot find it. That is, MEW is the trust fund to keep from triggering universal default in a range of other household balance sheet credit classes. If anyone thinks this is remotely plausible, have a go at filling in the charts.
Why do I think this is possible? Because I did something similar myself, and it was doomed - only a very fortunate job change altered the deathspiral.
If there's any validity to my hunch, then the stock of the problem turns rapidly to a flow problem in the near term, with resets all over the place, and household meltdown.
CC
gervasi - you need both savings and consumption to grow an economy. Think of the best way to spend your 50 on cannabis. You smoke some, then plant some seeds for future harvests. If everyone just smoked everything, there'd be nothing for the future.
Oh the other hand, if everyone just grew their own, there'd be very few sales to add up.
Fed Chairman Bernanke has argued that falling house prices, not equity extraction, impacts consumption
What? What then is done with the extracted equity?
gervasi the old consume vs. invest conflict is as old as dirt... think of it like a pipeline... if you don't consume anything why build the pipeline to transport the 'anything'?
On the other hand if you don't save (divert would be consumption to investment in say a 'pipeline') how will you allocate resources to build the pipeline to eventually consume?
The power of 'efficiency' is that it allows you to invest less to be able to consume more... a bucket brigade costs about as much in human resources as a pipeline but delivers a lot less stuff.
There has to be a balance & we've been skewed away from investment and toward consumption for far too long - payback will be hell.
We are on the cusp of seeing what all the green propaganda is really all aout: making a virtue out of the necessity of building a sustainable economy instead of one built on growth.
This need not be a negative if the idle rich at the top of the wealth pyramid allow the natural price deflation of capitalism's exploitation of technology to increase real wealth for the worker bees.
If they insist on offsetting that wealth effect through taxation and confiscation of savings through inflation then we can start this whole sordid cycle over again.
--
Whatever happened to decoupling?
Jas
yes, Jas.
what happened to decoupling?
A failed hope for the New World Order?
That new world being the BRIC's dominating the world stage of capital markets and currency power?
I may not have appreciated your skills Jas because you are damn arrogant.
Be careful Jas, you dont want to piss off the wrong people.
The traditional wealth effect, that Bernanke subscribes to, is based on a single-equation model of PCE. Becauase PCE is 2/3 of real GDP, the PCE equation obviously is nonsense. For example, the exogeneity assumptions underlying the parameter estimates are preposterous. Why do people who use parameter estimates from equations of this sort not at least offer caveats?
MEW is a measure of what people actually extract, and, to the extent that it is accurate, it is a much better starting point for estimating GDP or PCE effects.
Not only do we lose the consumption generated by the loans, we need to deduct the impact of future payments on the loan. Some are projecting a big stock rebound but lower earnings reports and little issues such as the chart in this post would lead one to believe that we are so totally screwed that a serious rebound is unlikely.
Very odd that Bernanke clings to the traditional wealth effect argument. It is obvious that if people can more easily tap into to their wealth, they will use it more often. Forty years ago, home equity primarily affected PCE only through the traditional channel of unrealized gains (there were few home equity loans or cash out refinancings). However during the past 20 years or so people have been able to easily tap into housing wealth in various ways, which clearly has accentuated the traditional wealth effect. Why does Bernanke igonore this? Is it because he is still wedded to textbook economics, which are twenty years out of date?
October 6, 2008 - LOS ANGELES - An unemployed man with an advanced finance degree who was despondent over his own financial problems shot and killed his wife, three children, mother-in-law and then himself in an upscale home in a gated community, police said Monday. Officers found the bodies Monday morning after the wife failed to show up at a neighbor's home to go to work, Deputy Chief Michel Moore said. The deaths occurred sometime after Saturday evening.
mean while in other news
October 6, 2008 - WASHINGTON (Reuters) - Lehman Brothers Inc. Chairman and Chief Executive Richard Fuld received compensation valued at $22.1 million in 2007, a year in which the company weathered the subprime mortgage collapse better than its rivals. Apart from his 2007 compensation, Fuld realized about $40.3 million from exercising stock options and $26.5 million from vesting stock awards.
Great article on a topic of current interest. However, focusing on estimating the marginal propensity to consume (MPC) out of housing wealth is a bad idea!
I do not buy that only 50% of MEW was consumed. What happened to the other 50%? Households have been selling financial assets, so it could not be saved and I doubt it was donated to charity. Let us face it. Almost 100% of MEW is consumed (including housing consumption)...
. However during the past 20 years or so people have been able to easily tap into housing wealth in various ways
They haven't been tapping into housing "wealth" at all, just borrowing against expected capital gains, which is the whole problem.
Wealth is the ability to buy or produce real goods and services. Not paper asset prices. If everyone's house price doubles, the country is not wealthier. There is nobody to sell the houses to.
Ben happily bends over every time Pimpco starts talking.
Anyone see that article about Fuld being punched in the face and knocked out in the Lehman gym? I wonder if we'll see more violence against execs in the coming months.
Anecdotal evidence is colored by our perspective and our expectations. Does it mean anything? Probably not. Anecdotes are little stories, and we humans love little tales about ourselves and our little lives.
That said, south lake tahoe retail is getting hammered and retail shops at the "y" are almost all closed up now. The rocky mountain chocolate factory last day of biz was yesterday. I bought a couple of caramel apples for $5 each and talked to the owner for awhile. He is closing his shop in squaw valley too. He tells me a friend told him that 1000 restaurants have closed in Sac over the past year. He has had his stores for 16 some years and never had a summer as bad as this, he tells me.
In that same shopping center there is a little store with modern looking womens clothes called styles. Prices are between 5 and 10 bucks for EVERYTHING. Salesgirl says they are doing fine. Store was pretty busy. Girlfriend liked some panties and a silver butterfly ring. Cost me 15 bucks. Happy girlfriend: priceless.
Then had to go to SF. Stopped in at Fairfield Chevrolet to look at Tahoes. The GM employee discount is over but they have a 0% 72 months deal. They offered me a loaded tahoe for 46k out the door at that 0% rate. I was the only shopper in on a nice sunday afternoon. They said they sold a lot of trucks and tahoes during the discount sale, which just ended. They told me they would do whatever it took to get me to buy the tahoe. I said I wasn't in any hurry. They gave me a bottle of water cuz I had a headache after driving all that way from the lake.
I didnt buy the tahoe. The girlfriend liked it though...
To me it borders on absurd to argue that home equity extraction is less important than the "wealth effect" that Bernanke is talking about. People had HELOC cards that they could take to the mall! When home prices were ballooning upward, people refied over and over to take out the equity. Some spent it at the mall, some spent it on remodels, some plowed the cash into their small business--but they all spent it. That was the point of the exercise. And now their home values are dropping, they are underwater, and if they have some kind of personal reversal (sickness, divorce etc.) they default.
Now all that is over, as the chart indicates so dramatically. And that drop from $700 billion in extraction to $less than $100 billion in two years is awesome indeed. That's $600 billion less economic activity. Look out below.
Fuld probably asked someone to hit him. Is sympathy from MSM worth a punch on the face?
"falling house prices, not equity extraction,"
You would still have equity extraction if house prices hadnt fallen to the point where equity lines have been frozen and new equity lines are only a teaser on a blackboard in a bank lobby.
Where is the value coming from? Ultimately the laws of physics and chemistry must be obeyed...
How long until we go back to beads?
cool old skool thread....
I am with yoghurt, I think 100% of MEW was 'spent', it had to go somewhere and be used for something. No point drawing down and letting it sit in a cheque account.
MEW passed through hands who all clipped the ticket somehow. That little gravy train has left the station...
That's the MEW used up, then.
Let the mewling begin.
Well, if we believe the graph, homeowners are not taking out 200$ billion a year - I assume they were actually spending the money (I sure as hell hope they weren't putting it into WM, Lehman, or Bear Stearns and have at least a granite countertop and some stainless steel appliances).
I would say they are spending less and are worth less.
DOW 6,000
It's unfortunate my post questioning the merits of higher consumer spending was deleted. Thank you Shnaps and dryfly for answering. You guys seem to agree that if lower MEW meanings less spending, that's okay. Spending isn't fundamentally better than its alternative, saving.
Comrade Counterpointer,
The Fed published MEW analysis:
http://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf
Superb!!!
with CR's TM
I never have been a spender.
I'd rather save most of what I make and let other 'consumers':
spend borrowed money
to buy crap they don't need
so CEO's can keep making millions
...
The drawback is that I end up paying for other people's irresposible behavior.
At least I still have my savings ...
Fortunately my house still has value. It is the location where I am presently hoarding two years worth of food and water.
Got gardening tools?
Last?
As Irvine Renter might say, HPA is desire whereas MEW is desire AND ability (= DEMAND).
Gents -
Taking the average MEW rate as about $700 billion/year in years 2004-2006, an assumption that all the MEW money was spent on consumption, and an M2 money velocity of 2, and a GPD of about $14 Trillion... we could estimate MEW financed to about 10% of GDP in the years 2004-2006. Since MEW has gone essentially to zero, we could conclude that we have lost about 10% of GDP in the last two years. The magnitude of this loss has not shown up in BEA GDP estimates. WHAT GIVES?
Charles J Gervasi writes:
"Economics Question: When you earn money, your choices are to save/invest it or to spend it. Which is better for the economy? If we save, that money goes to business projects that build means of production. If we spend it, the money goes to keep those means of production busy."
What you fail to see in this argument is that the money you spend ends up in the bank accounts of the people you buy from. Then that cash can be used to build the "pipelines" to get the product where you need. Spending is good for the overall economy, but bad for the individual - and we now have a lot of individuals in trouble.