Pragmatic Capitalism

Capital for Living a More Practical Life


Mike Konczal highlights an interesting point in the latest White House Economic Report:

The White House also looks to be on team balance sheet. See the latest Economic Report of the President(pages 110 to 114):

“The standard approach in economics has been to assume that households consume about the same fraction of the increase in their wealth each year, regardless of its source… The severity of losses experienced during the recession that began in December of 2007 in both national output and in labor markets makes these estimates appear too small…

A growing economics literature highlights the importance of household debt balances in influencing the severity of economic slumps… A series of empirical papers attempts to quantify the effect of such deleveraging on consumption (Mian and Sufi 2010; Mian, Rao, and Sufi 2011). These papers broadly suggest that the levered nature of household housing assets amplified the effect of pure wealth losses from the crash in housing prices.”

Konczal is referring to the fact that the White House is finally acknowledging the effects of the balance sheet recession.   Of course, I’ve been blathering on endlessly about the BSR for almost 4 years now.  It’s nice to see that once the patient appears to have stabilized somewhat, but substantial damage has already occurred, we’ve finally got the doctors coming in with the right diagnosis.  I think it’s rather funny that I am expecting the effects of the BSR to decline and eventually cease in the coming 18 months.   So right when I am changing my focus the powers that be are taking notice of something that should have been obvious to them a long time ago….

The problem for the US economy has been a simple one since the housing bust.  This was never the banking crisis everyone thought it was.  It was always a household crisis as I described back in 2008.   Households are the backbone of this economy and rescuing the banks while forgetting about the households was a colossal error.  One which has substantially hurt the US economy.  I guess it’s some consolation that people in power are recognizing the problem now.  Unfortunately, it’s too little too late.  The damage has been done.

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