"We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.
This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
Hummers, McMansions and Boats.
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For Q2 2008, Dr. Kennedy has calculated Net Equity Extraction as $9.5 billion, or 0.3% of Disposable Personal Income (DPI).
Equity extraction was close to $700 billion per year in 2004, 2005 and 2006, before declining to $471 billion last year and will probably be less than $100 billion in 2008.
ATM Says Insufficient Funds:
Foreclosure Filings Rose 71% in Third Quarter as Prices Fell: “U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac said.
The Result
From Bloomberg:The U.S. may be on its way to becoming a nation of savers, whether Americans like it or not...That is bad news for companies catering to them, which will have to retrench as well...
The big concern is that households, spooked by the turmoil in financial markets, will cut back rapidly and sharply, plunging companies into bankruptcy and deepening a recession that many economists say has already begun.
``If we did have a quick cut in spending, it could turn a pretty nasty recession into possibly the worst downturn we've seen in the postwar period,'' says Michael Feroli, a former Federal Reserve official now at JPMorgan Chase & Co. in New York. Even without a collapse of consumer spending, Feroli expects the economy to contract by 2 percent in both this quarter and the next.
There are signs that consumer spending is already giving way. U.S. retail sales fell in September for the third straight month, the longest slump since the government began keeping records in 1992. And consumer confidence as measured by the Reuters/University of Michigan index fell by the most on record this month...
``We are going through a quantum downward shift in consumer spending,'' says Allen Sinai, chief economist at Decision Economics in New York. ``Any industry that is tied to the consumer will have to downsize and consolidate.''
From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, Commerce Department figures show. But Americans got out of the saving habit starting in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and later through soaring home values.
Meantime, looser credit standards made it easier for people to afford major purchases without having to save up to pay for them. The result: Since 1990, they have set aside less and spent more, pushing the savings rate down to an average of 3.5 percent. It was less than 1 percent in each of the last three years.
That may be about to change as wealth and credit evaporate. Household net worth, as measured by the Fed, fell $2 trillion in the second quarter from a year earlier -- and that was before the stock market's nosedive wiped about $3.9 trillion off investors' portfolios in the past month and a half.
Credit is also harder to get. Borrowing by U.S. consumers fell in August by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion as lenders curbed access to loans, according to Fed data.
Add to that a cyclical rise in the unemployment rate -- it already stands at a five-year high of 6.1 percent and could increase to 9 percent, according to Microsoft Corp. co-founder Bill Gates -- and it is no wonder households are retrenching.
``Consumers are starting to realize that they've been living in a fantasy world,'' says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington. ``They will have to begin salting away money for retirement, their children's education and other reasons.''....
In the long run, higher savings would be good news for the U.S. economy, because the extra money would help put household finances on a sounder footing and lessen U.S. dependence on investment by China and other foreign countries to finance economic growth.
In the shorter run, though, it will likely mean wrenching changes for companies that have become reliant on rapidly growing consumer spending. Some firms have already begun cutting back to bring operations in line with lower demand....
More trauma is likely. The Washington-based National Retail Federation says this may be the worst holiday selling season in six years, with sales rising 2.2 percent in the last two months of the year from the same period in 2007.
``The consumer is dead in the water,'' says Howard Davidowitz, chairman of Davidowitz & Associates, a New York- based retail-consulting and investment-banking firm. ``We expect to see 10,000 to 12,000 stores shut next year,'' on top of almost 8,000 this year.
The tourist industry faces tough times as well. Host Hotels & Resorts Inc., the largest U.S. lodging real-estate investment trust, said third-quarter profit fell 44 percent after cash- strapped consumer and corporate groups cut back on trips to Hawaii. U.S. hotels revenue per available room fell 8.1 percent in the week ended Oct. 11 from a year earlier, according to Smith Travel Research, a Hendersonville, Tennessee-based marketing firm that tracks lodging data...
`The economic and financial crisis will have long-lasting effects on the consumer,'' Gramley says. ``The personal-savings rate is going to increase over the next five to 10 years.''The Gambit
700 billion bailout package and stimulus checks.
From Reuters, "Finance companies want US to buy bad auto loans":
The $700 billion rescue plan approved by Congress last month and now in the process of being implemented by the Bush administration enables the Treasury to buy up bad auto loans, if it deems that doing so is critical to the health of the U.S. economy.
and
From the WSJ: Bernanke Signals Support For Second Stimulus U.S. Federal Reserve Chairman Ben Bernanke on Monday threw his support behind a second round of fiscal stimulus by the government to limit the risk of a "protracted" slowdown in the economy.
The End Game
