Monday, July 18, 2011

Ken Go Predicted this Years Ago

A long time ago, at the beginning of the Bush era (the age of irresponsibility), my old friend Ken Go, a southern California mortgage broker, told me that a frighteningly large chunk of consumer spending was being fed by home equity. He said when this stopped, it would be disastrous for the economy.

How the Bursting of the Consumer Bubble Continues to Hold the Economy Back -

"Earlier this year, Charles M. Holley Jr., the chief financial officer of Wal-Mart, said that his company had noticed consumers were often buying smaller packages toward the end of the month, just before many households receive their next paychecks. “You see customers that are running out of money at the end of the month,” Mr. Holley said.

In past years, many of those customers could have relied on debt, often a home-equity line of credit or a credit card, to tide them over. Debt soared in the late 1980s, 1990s and the last decade, which allowed spending to grow faster than incomes and helped cushion every recession in that period."

I haven't asked Ken what he's been seeing in his crystal ball lately, but I'm sure it's not good. My guess is that a lot of demand is building up in the system as cars and refrigerators get old and need replacing, but who knows how long we could go before that demand starts seeing its way back into the system. I certainly don't see it happening until people who are upside down on their mortgages get right-side-up again.

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