"John R. Carroll" wrote:


Car sales, appliance sales and other retails sales of goods and
services fell off a cliff in 2008 and that happened not because the
government imposed some draconian tax or regulation.
There was no Tsunami or earthquake or hurricane
There was no mass epidemic of disease

The reason sales fell sharply and so many jobs that
depended on those sales were lost was simply because
a huge percentage of the population at once said to themselves:

"Oh ****, I better stop buying things and start paying down debt"

That doesn't even make sense.

It doesn't have to make sense but it does describe what happened.

It is undeniable that household borrowing habits, saving habits and
spending habits all abruptly changed.





People stopped buying because their disposable income went into the toilet.
There has been downward pressure on wages - wage deflation - going on in the
US for decades now.

That doesn't describe what happened
sales fell
through the floor in one month not over decades

And borrowing habits and saving habits changed just as abruptly
And they haven't changed back as the usually do in a recovery


For decades declining real income has largely been
offset by borrowing. And borrowing was regarded as benign because
the assets behind the borrowing were always
expected to stay ahead of debt

Here is a chart comparing Household real estate equity to
total household liabilities:
http://tinyurl.com/3jtwb9a

For 50 years things were in balance as owner equity
stayed usually a little ahead of debt keeping the difference
a little above zero

Looking at the chart
it is pretty obvious why people no longer believe that
real estate will always increase in value
that belief was what was behind the willingness to borrow
when that disappeared the willing to borrow disappeared
And that happened rather suddenly




Prices of the things people want and need, on the other hand, have been
rising steadily.

Health care costs and tuition are both good examples.
What people increasingly did to support thier standard of living was
refinance their homes and pull cash out to pay for things.
This had a number of advantages. The first of which is that mortgage
interest is tax deductable.
Sending kittle Joohnie to college was easier when you could pay for it with
a mortgage and deduct the interest.
Better yet, you could opt for a negative amortization, adjustable rate loan
and have the flexibility of chosing your monthly payment for a couple of
years.
As long as that mortgage could be refinanced when the teaser rate ran out,
you were good.
There was a downside. ARM's typically have a huge prepayment penalty before
a three year period but this is actually a feature if you are Wall Street,
and not a bug.
This is what predatory lending practices really look like - not payday
loans.

Between 2004 and 2007 as much as three quarters of the new mortgage market
was cash out refi's.
Half of all mortgages were ARM's of the 2/28 variety with loan to value
ratio's of 100 percent.

That is all true, but it is also water over the dam at this point



A cyclical slowdown coupled with an overheated housing market caused an
abrupt halt to rising home values.
In 2007, ARM's that were beginning to reset couldn't be refinanced because
there wasn't enough equity or the home owner had lost a job.
That left people with mortgages that either couldn't be paid or a cash
vampire that sucked up every single bit of disposable income when the
payment increased 20 or 30 percent.

Consumer demand hit the wall hard.
Foreclosures began to increase and a self reinforcing cycle began that ended
up manifesting itself in September of 2008 in collapse of fFnancial Services
and the Banking industry.
There are more than 2 million homes in foreclosure as I write this.
Nearly half af all mortgages in the US are supporting an asset with less
value than the loan.
Commercial and residential mortgages continue to suck the life out of our
economy and will do so until the markets clear and loan to value ratios come
back into line.
Something that could take as long as a decade or more.

It wasn't, and isn't a case of "Oh ****, I better stop buying things and
start paying down debt".

But it was exactly that.

But it doesn't matter how you want to explain it
the bottom line is
that households continue to not borrow
they continue to save at a much higher rate and that
translates into a lot less to spend to support jobs.
And if the government joins that austerity party it will
be a death spiral

-jim