Is the "Credit Crunch" Narrative Just a Scam?

Two points here.


First, I'll repeat something I've argued several times: the "credit crunch" meme that is so ubiquitous in the news these days obscures the larger story of the economic meltdown we're experiencing, which was precipitated by a massive loss of families' assets as the housing bubble deflated and the stock market tanked.

Second, contrary to what some think, I have no reason to believe, as others have argued, that the whole narrative was an invention the Bush administration pulled out of its collective ass in order to sell the public on throwing $700 billion at the banks under Hank Paulson's TARP boondoggle.

To the first point, here's some new data surveying the wreckage of Americans' financial health, with a hat-tip to Calculated Risk:

Rex Nutting at MarketWatch has more: Household net worth plunges 18% in 2008

Hit by the double whammy of declining home prices and a falling stock market, U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out five years of gains ...

Household percent equity was at an all time low of 43.0%.

Household Percent Equity

This graph shows homeowner percent equity since 1952.

When prices were increasing dramatically, the percent homeowner equity was declining because homeowners were extracting equity from their homes. Now, with prices falling, the percent homeowner equity is Cliff Diving!

Note: approximately 31% of households do not have a mortgage. So the 50+ million households with mortgages have far less than 43.0% equity.

Household Real Estate Assets Percent GDP

The third graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining rapidly. Mortgage debt as a percent of GDP was up slightly in Q4, and is only declining slowly.

It's an old lesson: Assets values can fall quickly, but debt lingers!

I feel like a broken record, but this is the big story as I see it. As I wrote a few weeks ago ...

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