Sunday, August 09, 2009

Interpreting US LTV problems

"Almost one-third of all U.S. households have no mortgage. If you adjust for that, the 70-80 percent debt-to-equity ratio suddenly becomes a major challenge because it means that the two-thirds who do have a mortgage already face a debt-to-equity ratio in excess of 100%. Even worse, once the mean reversion has run its course, two-thirds of US households will be facing a debt-to-equity ratio of 120-125% on average. U.S. CONSUMERS ARE EFFECTIVELY BROKE."

New Deal (htp: Credit Writedowns)

Has he got this right?

And how about us in Britain? Can anyone make sense of it for me?


OldSouth said...

First, consider the source: The Franklin and Eleanor Roosevelt Institute types.

FDR and Eleanor's vision really was of an America controlled top-down, the important caveat being that it would be controlled by people such as themselves.

At the bottom of the article, they are floating an idea that the Federal government itself refinance every mortgage in the country! Which, in effect would give Uncle Sam a lien on every residential space in the country. I think not!

For a number of reasons, owing to the mass cultural folly the US has embraced for the past 40-50 years, it is true that most American households are 'upside-down' in the Debt-to-Equity sense. And it is true that a relatively small group at the top of the food chain has benefited greatly. Both the economy and culture have 'hit the wall' simultaneously. I've never seen anything quite like it in my lifetime.

What most commentators don't account for in America is this: There is a great deal of ingenuity out there, and Americans are a very energetic lot. There will be a recovery, not soon, but it will happen, and it will occur in spite of the White House, Congress, and the Fed.

There will have to be a serious 'de-leveraging' i.e., people shedding debt by one means or another, and a restart of income generation, one household at a time.
Look for the creation of many micro-businesses, operating below the radar, most on a cash basis. Many produce gardens are already being planted. A neighbor is raking in 200-300 a day, tax-free, selling produce off her own property. She'll can a proportion to sell after the season. All off the books, but in the local economy, some $10-12k extra income generated in one household.

A lot of banks have yet to fail(we're at 72 so far this year). They deserve to, because they are toxic, harmful, and bankrupt. But life will go on, and opportunities will arise out of the rubble.

Yes, we're broke. But we're far from helpless and hopeless.

Sackerson said...

Very interesting, OS, and I agree that the get-up-and-go spirit is not dead in the USA. But there will have to be changes made when we're all through the storm.

OldSouth said...

Agreed, Sackerson, changes will have to be made. I hope some will come as we 'get-up-and-go'.

Great writing, by the way. You're on my daily rota of reading.