Bubbles Bursting Change Behaviour

Here's an "insight"... when you destroy trillions in wealth people feel poorer and spend less, and they start saving more to fill the crater left by falling house prices and lost investments. The following is from a NY Times article:

Tax cuts from the stimulus package and increases in Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it.

Tax cuts from the stimulus package and increases in Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it.

...

Although saving money helps individuals repair their finances and pay debts, a sharp rise in overall personal saving can actually deepen a recession and hurt the people who are saving more. As people save money, fewer dollars circulate through shopping malls, Main Street businesses, and large employers and subsequently back to workers through their paychecks. This thrift pulls the economy lower.

Economists say the recent spike in personal saving is likely to fall back slightly as the effects of government stimulus fade, but they have said that Americans are becoming thriftier and are not likely to return to the free-spending patterns that fueled much of the growth of the last nine years.

Steep declines in home values and individual stock portfolios have erased trillions of dollars in household wealth. The economist Joshua Shapiro of the consulting firm MFR noted that he was “clearly seeing signs of households altering their behavior in the face of large capital losses in investment and real estate portfolios, an abysmal labor market and tight credit.”

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The recession has already erased some six million jobs since December 2007, and economists expect the losses to continue through the rest of the year, despite the effects of the stimulus package.

The reason why the recovery from this recession/depression won't be fast is because it is more like the crash of the Great Depression than the standard post-WWII recessions. It will take a long time for people to recover their financial well being.

You can thank the sharpters on Wall Street for destroying millions of lives. And the funny thing, none of them are going to jail. If you do a corner store stickup, you can expect to spent several years in jail. But if you are one of the elite and destroy trillions of dollars, you get to walk away with your pockets stuffed with cash laughing all the way to your offshore bank.

From a research article by Carroll and Slacalek:

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This makes it obvious that this is outside the post-WWII "norm".

And here's the over-extension of credit (people borrowing to live a life style beyond their means) that lies behind this crash:

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The plunge into borrowing is because the Reagan "trickle down" economics that the Right promised from the 1980s on has not happened. People worked harder and actually earned less after adjusting for inflation. While the rich became fantastically rich, the middle and lower classes sank behind. The desire to "keep up" lured so many into debts they couldn't afford. Then the housing crash busted the banks and has now caused banks to pull in credit which is causing people to cut back on spending which means this becomes a very, very mean "recession". It becomes something closer to the classic 1930s Great Depression.