NOTE TO THE ECONOMIC WISE MEN: HAIR OF THE DOG IS NOT A VIABLE FINANCIAL STRATEGY

11/23/15

This morning’s Wall Street Journal reports that, with housing prices continuing to recover and with their recovery’s broadening from a relative handful of metropolitan areas, home equity nationally has doubled from its 2011 bottom.   At $12.1 trillion, such equity is nearing pre-recession levels.

What would normally be considered good news has much of Wall Street and the economic community bemused.   Observers are sullen and down-in-the-mouth over reports that homeowners borrowed “only” $43.5 billion against their homes via home equity loans, “scarcely a quarter of the amount seen when equity was last as high in 2007.”   Moody’s Analytics estimates, much to the consternation of the nation’s economic wunderkinds, that every $1 increase in home equity in the fourth quarter of 2014 would translate into only 1.5 to 2.0 cents of increased consumer spending over the next 1 to 1 ½ years, about a third of the increase in spending per dollar of increased equity seen before the crash.   (Incidentally, don’t you love the precision such experts assign to their predictions, as if the future could somehow be foreseen with digital accuracy?    Yes, I digress, but at least I do so parenthetically.)

Those of us whose thinking is seemingly hopelessly dated would see indications of fiscal probity on the part of consumers as a good sign, maybe not for the short run but certainly for our hopes of putting together a sustainable recovery and a durable economy.   Wasn’t it the “Spend, spend, spend because we deserve it and, after all, tomorrow we may die” approach to personal finance that got us into the soup from which we are supposedly emerging?   Yet the financial experts are telling us the opposite; they seem to think that the path to economic nirvana lies in excreting money as if it were the detritus of a five-hour beer binge.

Perhaps the clearly misguided views of us old school financial l scolds are a severe misreading of the data anyway.   While home equity borrowing may be under control, other types of borrowing, chiefly auto debt and student loans (“But it’s for education!” we will hear.   Money is fungible, though, as people would know if they were truly being educated, as opposed to being reassured that their every half-baked thought is sacrosanct as long as it complies with the rigid tenets of political correctness.  Again I digress.), continue to grow at an alarming pace, largely, or completely, offsetting the progress made on keeping home equity debt under control.  One supposes, though, that, in the view of the experts who so disdain fiscal propriety, such expansion of student and car loans is good news.

The problem that has set monetary policy, and much of the economy, on its head had its origins in too much borrowing to finance too much witless spending.  This nation’s economic brain trust continues to insist that the best way to solve this problem is to borrow more and to spend more.  Yet the populace continues to wonder why things don’t seem to be getting much better.  My readers, however, suffer from no such befuddlement.