Today’s must read MSM piece is a page one NYT article on how second mortgages — "the borrowing of last resort, to be
avoided by all but people in dire financial straits" — became transformed by a ubiquitous
ad campaigns into "universally accepted" forms of credit.
As we noted back in March via, the Federal Reserve released data showing that, thanks to HELOCs and MEW, Household Equity was at all time lows. As the chart below shows, we crossed the 50% household equity level For the first time since World War II. In the 1980s, that
figure was 70%.
Equity versus Debt
Chart via NYT Debt series
The one thing I haven’t really seen explored in this series has been the reasons why the sudden embracing of debt took place.
My own view has to do with the aberrant nature of this economic cycle. Instead of being employment and wage gain driven, causing a virtuous cycle of hiring, spending, and capex, and more consumer spending, it was backwards, unusually dependent upon ultra-low interest rates, housing and asset appreciation.
Is it any surprise that the weakest post-recession economic recovery since WWII in terms of job creation and wage gains led to an enormous debt creation? People are loathe to give up their standard of living, and they will — and did — go deeply into debt to maintain their "lifestyles."
Federal Reserve: Household Equity at all time lows (March 06, 2008)
Home Equity Frenzy Was a Bank Ad Come True
NYT, August 14, 2008