Marginal Rev makes the case that slipping housing wealth is the cause of this recession, not banking. A quote:
This is truly incredible. Homeowners have lost more than $5 trillion in housing wealth. There is a very well established wealth effect whereby $1 of housing wealth is estimated as leading to 5 to 6 cents of annual consumption. This implies that the loss of wealth to date would cause consumption to fall by $250 billion to $300 billion annually (1.7 percent to 2.0 percent of GDP). If you add in the loss of around $6 trillion in stock wealth, with an estimated wealth effect of 3-4 cents on the dollar, then you get an additional decline of $180 billion to $240 billion in annual consumption (1.2 percent to 1.6 percent of GDP).
These are huge falls in consumption that would lead to a very serious recession, like the one we are seeing. This would be predicted even if all our banks were fully solvent and in top flight financial shape. Even the soundest bank does not make loans to borrowers who it does not think can pay the loans back (except during times of irrational exuberance).
Link above. Of course, these things snowball with slipping markets further reducing wealth and causing people and businesses to feel more reluctant to spend. Finally, Springtime eventually returns once marginal and undercapitalized businesses have been swept away, and pricing finds its realistic level. I continue to insist that we folks are in an ordinary recession - but the banking biz is surely in a strange and ugly one.
I figure I have lost close to 20% of my net worth thus far, but that's measuring from the peak. One should never measure from peaks, because peaks never last. (Always measure things from historical trends.) Plus I really do not care what my home and land is worth, since I have no plan to leave it, I don't mind the bank holding title to it, I like having the mortgage interest deduction, and my equity line remains open (from which I used $150,000 for restoration work on the barns earlier this year - new roofs, new windows, plumbing, electric, repair rotten siding...). I have more wealth than I had 10 years ago, and that's what counts for feeling secure.
I am utterly relaxed about my hefty mortgage and home equity because I know that Obama will pay it for me, unlike that mean George Bush who never offered to pay my bills. And I can't wait to get my government pony. Ponies are cute and, if times get tough, you can eat them.
