Tuesday, September 23, 2008

Households' financial burdens are not excessive

You would think that in the aftermath of a huge rise in housing prices and all the refinancing and zero-down loans that took place in its wake, households today would be laboring under increased financial burdens. But you would be wrong. Data released today by the Fed shows that financial burdens dropped in the second quarter of this year, and as a result have not risen materially since 2001. The big increases in financial burdens happened in the 1995-2000 period, long before housing prices went up. This is just one more example of how the housing/subprime crisis is actually quite limited in scope. If anything, the wave of defaults and falling home prices sweeping the country is shifting the burden away from households onto the shoulders of the banks and other institutions that were holding the mortgages that are defaulting. In a sense it's a zero-sum game, and thus does not necessarily imply the imminent destruction of the U.S. economy.

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