A friend once remarked that over the last decade or so Americans had stopped thinking of their homes as a place to live and had started thinking of them as giant cash registers. A lot of Americans have second mortgages on their homes which they are using to finance the purchase of consumer goods, vacations, or college tuition. This trend has in turn pumped up the economy and helped George W. Bush get re-elected. This trend, however, may be coming to an abrupt end.
If you click on the link in this entry's title you can read an article from the Washington Post about how the credit crunch in America is spreading into global markets. Yesterday, August 9, 2007, the New York Stock Exchange suffered its second worst decline of the year as the cost of borrowing money for corporations continues to rise. Central banks in the U.S.and Europe pumped more than 150 billion dollars into global markets on Thursday, August 9, 2007. This is a quote from the article:
The first signs of trouble appeared in February after lenders reported record defaults in subprime mortgages, or loans sold to people with questionable credit histories. More recently, companies with poor credit have been denied loans. Now, even credit-worthy borrowers are struggling to obtain access to debt.
This tightening of credit markets will, in turn, affect consumer spending. This is how the article puts it:
The problems are also beginning to affect consumer spending, a key component of the economy. A report Thursday showed that July was a difficult month for retailers, a sign that a slumping housing market may have reined in spending, said Ken Perkins, president of the research firm Retail Metrics. Last month, 61 percent of retailers missed sales growth expectations for stores open at least a year. The norm is 42 percent.
The era of the American home as cash register is coming to an end. It will be interesting to see both the economic and political fall-out.