Equity for an SUV

One great myth of the equity withdrawal during the great bubble is that much of the money went to necessities. While some people dipped into saving for medical and health care expenses, the great unraveling was due to conspicuous consumption. It is interesting seeing the frivolous purchases directly linked to the meltdown. The Modesto Bee has an interesting article titled A recession would clear air of outdated economic models that is jam packed with facts, figures and historical analysis. Lets take a look -

The arithmetic of our current problem is pretty simple: From 2000 through 2007, U.S. households borrowed $6.2 trillion, nearly doubling their debt. Most of it was borrowed against houses, and about two-thirds was spent on things other than another house or paying down mortgage debt -- including SUVs, flat-screen TVs and all the other consumer baubles of an American lifestyle. But when house prices collapsed, the home-equity cash spigot shut tight. U.S. consumer spending has fallen off the cliff, devastating car companies and closing factories throughout China.

The Treasury Department and the Federal Reserve have responded with pyrotechnics. The Treasury has infused hundreds of billions in cash into banks and other financial players. Even more remarkably, the Fed has distributed more than $1 trillion in new loans and credits to a broad range of financial and nonfinancial companies. The automobile manufacturers have now joined the queue, and Obama has signaled that he'd like them to be included in the bailout.

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All these frenzied attempts at staving off recession seem to be aimed merely at jump-starting the consumer borrowing-spending binge that underpinned the ersatz growth of the 2000s. But the real need is to shift to a more balanced system that's less addicted to high-leverage finance.

Pouring money from the Fed into the banks just delays the day when banks -- and now we taxpayers -- will have to tally up our losses. The Fed is exchanging Treasury bonds for bundles of subprime mortgages at 98 cents on the dollar. But in the real world, those bundles could barely fetch 30 to 50 cents on the dollar. Does the Fed seriously believe that subprime mortgages are going to recover their value? The Japanese tried papering over bad assets during their 1990s credit crunch, and their economy has barely budged in 20 years.

At the same time, Congress and Treasury Secretary Henry M. Paulson Jr. are insisting that banks increase lending. To whom? House prices are still falling at double-digit rates. Credit-card defaults are spiraling upward. Companies are weak. Banks know how fast their loans books are deteriorating, and they desperately need cash to build up their reserves against all the bad loans they've made. Forcing them to ratchet up lending now is just pushing them back into the quicksand they're struggling to climb out of. It's financial folly. It would also be political folly for the new Obama administration.

There will be pain no matter what decisions are made. Some big things to note is trying to fix the system versus gaining short term political points. The former is what needs to be done. The latter is what got us to the point we are now.

We agree in getting the smartest people together to solve the problems. But we have to watch out for the ideologues.

As for this article - it was written by Charles Morris author of "The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash." Definitely a book to check out.