I was reading a story about how innovation will lead us out of the current financial crisis (the online version has some differences from the print version). What really interested me was not the praise given to innovation, which is the central point of the article, but some of the facts and figures the author gave about the cause of the crisis.
He lays the blame for the crisis not on any one group, but on just about everyone involved; American consumers, the U.S. government, politicians, banks, rating agencies and regulators. And he says that allowing Lehman Brothers to collapse is what really made things awful. But on to the numbers.
From 1930 to 1997, U.S. house prices grew by .7% annually. From 1998 to 2006, they rose at an 8% clip.
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driving mortgage equity withdrawals to over 10% of disposable income versus 3% a decade earlier and the equity content of the U.S. housing stock down from nearly 70% in 1965 to 43% - the lowest level since records have been kept.
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These lower-quality mortgages grew from less than 10% to 40% of originations; interest only or negative amortization loans that didn't require near-term principal repayment were introduced and grew to around 25% of originations; and over 75% of these mortgages were not held by the lenders but rather were packaged into securities and sold to others.
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Consumer balance sheets swelled with indebtedness as debt service payments reached nearly 15% of disposable income - as in the 1930s.
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we experienced after 2002 the first economic recovery since the war in which real median incomes went down.
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The decline in the prices of stocks and values of homes robbed American households of nearly $11 trillion in net worth - which equals the combined output of Germany, Japan and the U.K. - and perhaps $30 trillion globally. Since consumers usually spend about 5% of their net worth a year, the negative "wealth effect" likely caused them to reduce spending by about $550 billion domestically and perhaps $1.5 trillion globally.
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