The Real Economic Danger

[Joanne98]

The Real Economic Danger

Even before Wall Street went bonkers, consumer debt was at an all-time high and median wages were dropping. But most middle-class folks didn't have to face these unpleasant facts because their homes were worth a lot of money. That's not true anymore.

Robert B. Reich | September 10, 2007 | web only
http://www.prospect.org/cs/articles?article=the_real_economic_danger


Wall Street's tumult shouldn't matter as long as consumers keep buying stuff, so that companies will keep producing it and putting people to work. The worry is the financial crisis will leach into the real economy and cause consumers to stop buying as much as they were buying before.
You see, even before Wall Street went bonkers, consumer debt was at an all-time high and median wages were dropping. But most of us didn't have to face these unpleasant facts because loose lending and easy money pushed up the value of our homes. So we could treat our homes like bottomless piggy banks through refinancing and home equity loans, and pretend we were rich enough to go on splurging.

Now that the days of loose lending and easy money are over, home prices are dropping all over the country, and our piggy banks have gone bust. So we have to face the awful truth that, as the Census Bureau revealed last week, the median household is earning less than it did in 2000, before the last recession. Meanwhile, the costs of fuel and health insurance continue to rise. That same Census report showed that more middle-class Americans than ever can't even afford health insurance.

Add to this an estimated two million families who won't be able to meet their mortgage payments over the coming year, millions more who are afraid they won't be able to, a spike in the rate of credit-card defaults, and a new law making it harder than ever to declare personal bankruptcy, and what do you get? An American middle class suddenly aware it's been living way beyond its means, and can't do it any more.

The only group whose earnings last year were higher than in 2000 are households in the top five percent of the distribution. Even if you have no ethical qualms about the widening gap between the rich and everyone else in America, you gotta know the rich can't possibly buy enough to keep the economy going.

For that, we need a huge middle class with money in their pockets. And that's exactly the problem. Wall Street's crisis is shocking the middle class into realizing how little money it actually has. And that realization may push us smack into a recession.

This column is adapted from Reich's weekly commentary on American Public Radio's Marketplace.
http://www.prospect.org/cs/articles?article=the_real_economic_danger

[dipsydoodle]

1. Consumer spending levels

were artificially pumped up by use of credit cards which were then paid off using equity funded from the appreciation in housing values ad infinitum. Now that system is broke comsumer spending should restore to a more natural level.

[Bonhomme Richard]

2. Add to that consumers are spending an extra $40.00 or so...

a week on gas. That is straight, out of pocket money. Money that would have been spent on food, the movies, a dinner, or any other such thing that tends to keep the economy moving along.

[Warpy]

3. What is shocking the people who thought they were middle class

by their ability to leverage debt against inflating house prices is that they can no longer play that game. They have nothing left to leverage reasonably priced debt against and must choose between plastic with the possibility of usurious interest rates and doing without.

The latter is going to be the choice of most of them, and the illusion of prosperity is going to come to a screeching halt and with it, spending.

I don't know yet if it will be enough to collapse the consumer economy and provoke a depression. I do know the awful realization of most that their net worth is in negative numbers is just starting to sink in and that the ARM crisis is only a small part of it.

[fed-up]

4. "Consumers' behavior will decide whether the current slowdown becomes a recession."

consumers that can no longer tap home equity loans or that have maxed out on their creidt cards or

those that have finally decided to live in the here and now and wipe out all dept

those consumers???


http://www.philly.com/inquirer/business/20070908_Consumers_behavior_will_decide_whether_the_current_slowdown_becomes_a_recession_.html

Consumers' behavior will decide whether the current slowdown becomes a recession.

Posted on Sat, Sep. 8, 2007
By Ellen Simon
Associated Press

NEW YORK - American consumers hold the key to whether the unexpected drop in August employment signals a continuation of a gentle economic slowdown or a tumble into a recession.

..snip
A net decline of 4,000 jobs reported by the Labor Department yesterday capped a worrisome run of economic news: soaring mortgage foreclosures, declining housing prices, credit tightening, and wild stock market swings. Throughout, however, consumer spending remained a bright spot.

..snip

Consumers, whose spending accounts for roughly 70 percent of the U.S. economy, have started pulling back, said Joel L. Naroff, president and chief economist at Naroff Economic Advisors in Holland, Pa.

If the pullback accelerates, perhaps hastened by a suddenly uncertain job market, "it almost sets off a domino effect," he said. "Businesses, which are increasingly uncertain in their spending decisions, could say: 'Why spend into a recession?' Then you've created one."

Economists forecasting a sharp economic slowdown point to employment numbers showing that some industries are contracting dramatically. The manufacturing industry has lost 215,000 jobs over the last year. Construction employment has fallen 96,000 since its peak in September 2006.


...snip

[cliss]

5. A massive storm on the horizon. Black clouds.

The first raindrops have started falling.

It's hard to believe that the Perfect Storm which is about to hit will affect so many families. I've read that it's no less than 7 MILLION homes that could be in foreclosure in the next 6 months. How is that possible? If you estimate about 4 people in each house, that's about 28 million people. 28 MILLION people out on the street? It's just mind boggling.

That's about 9% of our total population in the U.S. It will become a civil war if this happens, no shit.