The Consumer's Need for an Equity Infusion (or

Despite all the talk comparing our current economic situation to the Great Depression, the FT.com's Krishna Guha hits a bit closer to home when it states that the country is likely to plunge "...into what many experts believe will be its worst recession since 1982."  Today, this comparison carries more weight psychologically because more people can relate to 1982 than they can to 1932. 

The impact of the current credit market collapse on the banking and finance industries has been unexpectedly wide-spread and deep-rooted, no doubt, presenting our leaders with the opportunity to transfer more than $700 billion from the public coffers to the private sector.  I say "more than" because there has yet to be a government program with an estimated cost in the "B" billions that has not just come in over budget, but rather astronomically above budget.  But that's a different discussion.  The one point that has been not totally absent but rather down-played from the high-minded talks about how best to spend US Treasury funds has the importance of the consumer.  You and me (and Joe the Plumber, if he ever gets his business up and running.) 

The US economy is driven by consumer consumption.  How much of that $700 billion+ is being ear-marked for the consumer's pocket?  Not enough, apparently, in light of falling consumer confidence coupled with rising unemployment that has reduced the consumer's propensity to spend.  As reported in Guha's article, the unemployment rate is expected by some to jump from its 6.1% level to somewhere north of 8%.  Ouch.  In other words, people are thinking more about how to pay their bills and make sure there is enough cash set aside in the much maligned Emergency Fund.  So despite the credible stories of tighter consumer credit lending standards (have the banks done too little too late?), I'm also curious about the metrics out there on the rate of consumer demand for such products.  My logic tells me that the tighter lending standards were accompanied (if not preceded) by reduced demand for consumer loans in the face of rising uncertainty. 

So if the credit markets do "thaw" and the lending spigots reopen, it is the institutional side of the market that will be back in play, but the consumer side is likely to take longer to come back to life.  More important than the the consumer's access to credit is the state of the consumer's balance sheet, which is in pretty bad shape following the substantial decline in its equity account.  In other words, the level of debt relative to equity has shot up because of the decline in value of real estate values (the major piece of equity on the balance sheet.) 

For example, before the economy fell in the shitter, I owed $400,000 on my mortgage (my liabilities), but the market value of the my house (my equity) was $650,000 and my stock portfolio was valued at another $250,000 so I was feeling rather flush.  I might have even considered taking out $100K in equity to buy stuff.  But now, I still owe $400 large, but the market value of the property has declined to $400,000 and my equity portfolio is now worth a $1.49, so now I'm feeling like I just lost a shitload of money and not really in the mood to spend.  In order to boost my confidence and get me back to spending, I'm gonna need my liabilities to decline, my equity to increase or some combination of the two.  And in all honesty, at this point, I'd prefer that increase to be more liquid (like stocks) than not (property value).  [This last point is for another post on the volitility of the equity markets - any gain in stock value will be quickly followed by people looking to cash out, which will then push down equity values.  What a fucking see saw.]