Here's an updated chart (with data through 12/31/08) from a post in late December. The story remains the same: households in aggregate did not acquire excessive debt burdens in the years leading up to the housing crisis, contrary to the popular perception. Institutions were the ones that were caught with their pants down, having grossly underestimated the risk of housing price declines and mortgage defaults. The losses have been absorbed for the most part by now, and economic life is continuing.
In my last post on this subject, I speculated that once the institutional losses were recognized, we would discover that consumers on average were still in decent shape, and the economy could therefore resume its upward march. With the wind seemingly at my back, I would argue further that there is no reason to think that consumers are going to be behaving any differently in the future; no reason to expect a huge increase in the savings rate, and no reason to expect a big decline in consumption spending. Well, perhaps some changes, of course, but my point is that we needn't expect that we are entering some brand new world or that the economy will be significantly different from what it has been.
My last post generated some controversy, and I expect this one will too. But I think the improving economic fundamentals that I have been pointing for the past several months lend weight to my arguments.