July 14, 2009

Too Many Savers?

Paul Krugman has stated that he believes one of the biggest challenges facing the recovery is the phenomena of "too many savers".

Here is a chart of household "savings"

And to put that in context, lets look at household "debt"

These to graphs tell the tale of easy access to capital and leverage. It was certainly the case that households were not incented to save but rather to borrow and "invest" (speculate).
If there is, as Krugman states "too much saving", then one has to wonder to what end?
It seems more the case that there is a massive deleveraging of the consumer financial system,
one that will take many, many years to reach some sustainable equilibrium.
One way the government could aid in this repair would be to undertake radical tax reform as Art Laffer has suggested.

I am not a big fan of Laffer. He's the same economist that bet Peter Schiff that there would be no recession and that the housing bubble would not burst. But as the saying goes "even a broken clock tells the right time twice a day", and Laffer's Tax argument holds water, even if he does not.

Tax breaks should come with the responsibility of each recipient to use at least 50% of the proceeds to pay down personal debt. Consumer credit rates should be subject to a one time drop to do this (only for paydowns, not new loans!!).

The Government should also force all high school students to get a personal financial certificate as a prerequisite of high school graduation (for GED's as well). This could be extended to a requisite for citizenship or even a minor tax incentive.

The only way that society will avoid the mistakes of the past, is if they are actually held accountable for learning from them.

July 5, 2009

Why its not time to take the Housing Casserole out of the oven just yet

The US economy is,was, and will be dependant on real estate values. Given the historically low level of savings rates in the United States, combined with high personal debt levels, much of the US consumer's wealth lies in their home equity.

The Case Shiller Housing chart (depicted nicely here), would appear to map nicely with US economic activity and wealth in general. At the current level of 155, houses are still ~ 25% more expensive than the peaks of all previous housing booms. Given the higher rates of leverage (less "money down") on homes today compared to past periods, it would stand to reason that their is still lots of wealth destruction ahead of us in the housing market.

Provided that home "owners" are willing to sit on negative equity, and more importantly are ABLE to sit on negative equity, a further decline in the Case Shiller index could have a minimal impact on the banking system that wrote all those home loans. More likely, MBS investors may find themselves with less assets than they are counting on.