Looks like the American consumer is finally tapping out. Expect a really abysmal Christmas, followed by a year where consumer demand drops.During the summer of 2006, I was and still am curious as to how the housing bubble bursting will affect politics. Most of my questioning at the time was related to local politics and stuck flippers, but I think these questions can be expanded to a much larger group of people and geographical scope:
Consumer spending has been entirely driven by home price asset inflation, which has been withdrawn in the form of loans, along with other forms of consumer borrowing. The US consumer actually has a net negative savings rate. That's not sustainable, and now that housing prices are beginning to drop, and ARM (adjustable rate mortgages) are going down, it's not going to be sustained.
However, what happens when speculators are forced to stay in properties that they were trying to flip because they are effectively upside down at current market prices. They have three basic choices; the first is sell now to minimize guaranteed losses due to carrying costs and find outside assets to make your mortgage holder whole, the second is a variation of the first, and that is to default and walk away with damaged credit. The final option is to hunker down, piss money down the hole while minimizing carrying costs and wait for the market to turn around at some indeterminate point in the future.People who are stuck with mortgages and houses that they can not sell, refinance or service will be looking for help. They will be looking for refinancing deals, special breaks, holds on foreclosures, delays on credit reporting, and most significantly at the local level, assistance on minimizing the quasi-fixed costs. That means support for more heating and energy assistance, lobbying for lower insurance limits for flooding and hurricanes in disaster prone areas with the hope of either dodging the bullets, or shifting those costs to someone, somewhere else, and most importantly, constant and downwardly revising re-assessments without concurrent increases in millage rates. Ian sees something different...
If this third scenario is the basic course of action adapted by a speculator, then the incentive to get involved in local politic goes up massively. Now if you live in Pittsburgh like I do, the crushed speculator demographic is minuscule and politically irrelevant. However if you live on the East Coast, in California or on the Florida coasts, this demographic is going to be fairly large, and fairly loud because they are in significant pain. So how will they respond in local politics? [emphasis added]
Aided by the bankruptcy bill passed by Congress, the leg-breakers will be out after Americans. But they're going to find that no matter how much Uncle Sam is willing to bust kneecaps to help you get your 20% plus penalties, you can't get blood from a stone.I don't expect a lot of this to happen; instead I expect a combination of localized political actions to become much more favorable to debtors, as the US has a long history of these types of actions, starting with the pre-cursors of the Shays Rebellion. Even more likely, I think in severely impacted domains state and local officials will make it known to debt collectors to not expect timely help if they run into troubles enforcing debts.
I expect, as entire communities are devastated, that those who try to repossess cars, homes and other assets will, by 2009, be facing actual threats and violence.
On a national scale, I think Digby is right in that tough times will create openings for new groups to be blamed; right now immigrants are bearing the brunt of these accusations, but this could expand if more scapegoats are needed:
The election feels eerily reminiscent of 1992, when so-called reasonable centrists stoked the crazy man Ross Perot's campaign by backing his obsessive concern for "the deficit" which was nothing more than a weird abstraction into which misinformed discontented voters could pour their economic fears.People are going to be looking for others to blame instead of looking for tough, systemic explanations, so there will be openings for demagogic populists out there and an even nastier zero-sum politics.