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Sunday, November 16, 2008




The Behavioral Revolution

Another wave of deleveraging is hitting the US, this time it's the consumers.

Suddenly, our consumer society is doing a lot less consuming. The numbers are pretty incredible. Sales of new vehicles have dropped 32 percent in the third quarter. Consumer spending appears likely to fall next year for the first time since 1980 and perhaps by the largest amount since 1942.

With Wall Street edging back from the brink, this crisis of consumer confidence has become the No. 1 short-term issue for the economy. Nobody doubts that families need to start saving more than they saved over the last two decades. But if they change their behavior too quickly, it could be very painful.

The truth about the current crisis is that despite a storm of accusations and fingering directed at Wall Street, Wall Street was by far not alone in its addiction to operating on very risky leverages. In the last decades the saving rates in the US were steadily declining reaching their historical lows amidst exuberant celebrations financed through overdraft and abuse of credit cards. Neither the government with its budget, nor the fed's monetary policies were really falling behind. In this sense it's possible to say that in the years preceding the crisis, the whole society, and not only Wall Street, was recklessly and dangerously leveraging up. This points to a possible cultural component among many factors behind the collapse. The current crisis is just as much about culture as it's about loose monetary policies, subprime mortgages and structured investment vehicles. This crisis is very much a cultural event and as such it may have very far reaching consequences.

As Joshua Shapiro of MFR, an economic research firm in New York, puts it, the American consumer has quickly gone from being the world economy’s greatest strength to its Achilles’ heel. “Everything has changed,” he says. “The financial sector is deleveraging. Credit availability is severely constrained. Asset prices are deflating. And household balance sheets are severely stressed.”

It would be silly to insist that a few terrible months meant the end of American consumer culture. But it would be equally silly to assume that culture could never change. It might be changing right now.

Source

The Treasury is now planning to spend the rest of the bailout package on boosting consumer spending. However, one would think that its efforts will meet with a limited success just as it happened with the banking industry. Of course, both institutions and ordinary Americans are now frenetically deleveraging themselves to reduce their exposure to market risks out of the expectation for things to get much worse and soon. However, there should be also no doubt that the culture is changing and in this sense there is not so much Paulson and Bernanke can do about it. They are just trying to stop the inevitable. It's not for nothing that in his appearance before the senate committee, Greenspan thought it right to make the following comment:

"Whatever regulatory changes are made, they will pale in comparison to the change already evident in today's markets," he said. "Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime."

Source

Ironically, the only sector still defying the deleveraging trend is the state and the regulators. At the current rate soon even dogs and cats will be targeted by the regulators with their bailout packages.

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