There are more than a handful of notable economists and investors who believe that the current credit crisis is really just an extension of a much larger bust that was set in motion more than a decade ago. In essence, the 90′s created a mentality that everything was different. American net worth exploded and the world appeared to be permanently altered for the better. Specifically, assets to liabilities soared:
Then the Nasdaq bubble burst and the paper wealth went up in flames. Alan Greenspan’s approach was simple. If we could simply reflate the consumer balance sheet through asset reflation everything would be resolved. So, the consumer was encouraged to continue taking on excess debt without the underlying income to sustain this debt. In essence, Americans were trying to sustain the lifestyle that they had become accustomed to in the 90′s and the Federal Reserve and Treasury did everything in their power to maintain that lifestyle.
As the housing bubble grew Americans once again felt the invincibility of paper wealth. Of course, just like the Nasdaq bubble none of this was actually supported by the underlying fundamentals. And as the housing bubble wealth effect dissipated in 2005 so did the ability of the consumer to sustain its 25 year spending spree:
The surge in household wealth due to the double bubbles proved to be nothing more than paper gains that were not supported by the underlying fundamentals. Assets were higher than they otherwise should have been. It’s clear, in retrospect, that Americans never really recovered from the excesses of the 90′s. The government’s response to this bubble era has done little to help create the foundation for a sustained recovery.
This past weekend, Brian Sack admitted that the Fed’s recovery plan is largely dependent on propping up asset prices that would “otherwise be lower”. The U.S. government hopes they can reflate assets and sustain a supposedly capitalist market without having any losers. They just can’t come to grips with the fact that there are decades of excesses that have yet to be resolved and that perhaps we need lower asset prices in order to create the foundation for a sustained recovery. Propping up assets is not a recipe for economic recovery. This reflation plan didn’t work the first time around. I am not sure why anyone thinks this reflation recovery would ever work this time.
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yup…..like i’ve said before, this secular bear market(averages 14-18 years) started in 2000……do the math….i’d use the higher average if i were you.
record NASDAQ optimism:
http://4.bp.blogspot.com/_wmz32xeNKtU/TKyUgG9RkKI/AAAAAAAACeA/YxZtY6Hr9Uc/s1600/Nasdaq+Daily+Sentiment+Index+from+Market+Harmonics+-+2003+thru+10-15-2010.PNG
you know what comes next.
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when in doubt, blow another bubble!
it SHOCKS me that the Fed doesn’t understand that the best this can possibly do is delay the inevitable reckoning and make it worse at the same time.
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This is a great post TPC
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Ben Bernanke is an ignorant fool. We never learn. He’s academic. Tell him to pick up a history book for crying out loud.
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Nice Cullen. You give the academic, nuts and bolts version of my quick and dirty version.
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This should be your first book.
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Amen
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Yes, very succinct. I think there is a typo in there
“And as the housing bubble wealth effect dissipated in 2005 so did the ability of the consumer to sustain its 25 year spending spree:”
Shouldn’t that be 2008?
Could you expand a little on the chart?
How much of the HH net worth was housing, and how much was investments?
Housing prices, as a ratio to HH income, stayed pretty steady at 3.4 HH income from 1989 to the 1999, then rapidly increased from 2001 to 2006, peaking at 4.9. It’s at 3.3 now.
Data all from here, just released:
http://www.jchs.harvard.edu/publications/markets/son2010/index.htm
Appendix W-2…
Wow, what a gold mine of data!
According to the study, the last time a home mortgage payment was this affordable (payment to HH income) was before 1989! This is on a national basis…where I live it’s only down to 2004 level of affordability.
Also, how is disposable personal income defined in your chart?
Sorry if I veered a bit off topic.
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Roger Ingalls Reply:October 7th, 2010 at 3:42 PM
I’m referring to enhancements and clarification on the 3rd chart, the first one states “liquid assets to liabiltiies”.
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Roger Ingalls Reply:October 7th, 2010 at 4:32 PM
After further reading of the 2010 Housing study (I could not put it down!), it says that
“As a result of lower home prices and interest rates, mortgage payments on a median-priced home (assuming a 90 percent loan-to-value ratio) dropped below 20 percent of median household income"”the lowest level on records dating back to 1971.”
http://www.jchs.harvard.edu/publications/markets/son2010/son2010_executive_summary.pdf
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