Washington Independent: Credit Crisis Only Begins With Mortgages

[marmar]

Credit Crisis Only Begins With Mortgages
A Look at the Consumer End of a Stumbling Economy
By Charles R. Morris 02/12/2008


One can pity Federal Reserve Chairman Ben S. Bernanke. No other federal reserve chairman ever cut interest rates by a full 1.25% within just eight days, as Bernanke has done. But the monetary skies remain as leaden and thunder-clouded as ever. The stock market keeps quivering downward, crowds thin at the malls, jobless queues grow. Wal-Mart reports that customers are using their Christmas gift cards for groceries.

The hard reality is that the economy is facing a one-two knockout blow from a collapse in consumer spending, plus a shock-and-awe wave of asset write-downs that is wreaking havoc in the financial sector. The more Bernanke floods the economy with easy money, the worse the final reckoning is likely to be.

First the consumer. For decades, personal consumption’s share of GDP averaged in the 66 percent-67 percent range. In 2000, however, it moved up sharply, hitting 72 percent in early 2007, the highest rate of consumption in any modern country ever.

How did consumers pay for it? Well, not with their wage packet—median household incomes were roughly flat in the 2000s. Instead, households doubled their debt load, and personal savings rates dropped to zero.

Almost all the new borrowing was against houses. Very low interest rates and super-easy mortgage rules drove house prices up 50 percent between 2000 and 2005, one of the fastest jumps in history. As prices soared, consumers refinanced again and again, rolling over the proceeds into pricier houses and more consumption. Wall Street’s economists looked on happily, and constructed elaborate theories proving that the debt spiral could continue indefinitely.

But as outstanding mortgages balances ratcheted higher and higher, they finally smacked up against the ability of homeowners to service their debt, no matter how low the interest. A tipping point was crossed last year, when it dawned on markets that houses were overpriced – and by a whole lot. Home prices are now in free fall; price drops of 20 percent to 30 percent will be required to get them back in line with incomes. Stuck with heavy debt service and no cash left in their homes, consumers are cutting back hard. The credit merry-go-round, in short, has started to run backwards. ....(more)

The complete piece is at: http://www.washingtonindependent.com/view/part-one-facing-the