Reasonably Thinking

A good, brief article:

http://www.hussmanfunds.com/wmc/wmc090908.htm

“…prior economic recoveries have relied on the expansion of debt-financed economic activity such as housing starts, capital spending, and other forms of gross domestic investment, as well as sustained automotive demand (beyond a brief Cash for Clunkers jolt)…

It strikes me as hopeful to expect this at present, in the face of continued deleveraging pressures, fresh highs in mortgage delinquencies and foreclosures, and a huge second-wave of adjustable rate mortgage resets on Alt-A and Option-ARM mortgages that were initiated at the peak of the housing bubble (which will become pressing beginning in November and December, and will continue through 2010 and 2011).”

I found this article by accident.  This line is rather interesting because it was written in August, 2004:

“We found that a relapse (of the Great Depression) isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

http://www.newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

A short article on the wealth effect.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14365068

Preview:

…Put another way, every $1 increase in home values led to a rise of 25-30 cents in borrowing. That is far bigger than some long-standing estimates of the wealth effect from rising asset values, which are in the 3-5 cent range… Funds raised against rising home equity were not used to pay down other debts. And fewer households invested in financial assets, such as shares and bonds, when house prices were rising. All this suggests that almost all of the $1.45 trillion the authors estimate was borrowed against rising home equity was used for spending.
This suggests huge over-borrowing. Prospects for a sustained recovery look dim if households that are most inclined to spend are mired in negative equity.

(I calculate that $1.45T to be about 10% of GDP that will not recur as it was borrowed from the future, and probably not yet repaid).