That's what readers would probably conclude from a column headlined "Americans have record wealth but aren't spending it." The first paragraph begins:

"In the economic history of our time, June 6, 2013, ought to occupy a special place. That’s the day the Federal Reserve disclosed that the net worth of American households — the value of what they own minus what they owe — hit $70 trillion, a record that exceeded the previous peak before the 2007-09 financial crisis. Higher stock prices and a long-awaited housing recovery are slowly restoring Americans’ lost wealth. By all rights, this symbolic crossing ought to improve confidence, prompt consumers to spend more freely and increase the economy’s growth."

Okay, let's first check the story that consumers are not spending freely. If we turn to the most recent data we see that the saving rate for the first quarter was 2.3 percent. That is slightly higher than the 1.5 percent saving rate we saw at the peak of the bubble in 2005 and 2006, but it's not hugely different. (Arguably, because of the statistical discrepancy in the national accounts we should view the saving rate as being somewhat lower at the bubble peak.)

It is possible that the first quarter saving rate was somewhat lower than normal because households were taking time to adjust their consumption to the ending of the payroll tax cut. Also, they may have been spending part of the big dividend payouts that were made in the 4th quarter to beat the rise in tax rates. If we average in the 5.3 percent saving rate from the 4th quarter, we get an average of 3.8 percent for the last two quarters, 2.3 percentage points above the saving rate at the peak of the bubble. So the question is why consumption is not back to its bubble peaks if wealth is back to its bubble peak.

Samuelson tells us:

"Here’s where the process seems to have broken down. Before the financial crisis, says economist Mark Zandi of Moody’s Analytics, an added dollar of housing wealth might produce 8 cents in extra spending, and an extra dollar of stock wealth, 3 cents. The overall effect was about 5 cents per dollar of new wealth, Zandi says. Now, 2 or 2.5 cents 'seems more likely to me.'" 

Okay, let's check that one.

Paul Krugman has a nice post on the housing bubble in Canada. Needless to say, I strongly agree. It is painful how so many people refer to this downturn as the result of a financial crisis.

I have often posed the simple question of what would be different right now if we had not had the crisis but house prices were exactly where they are today. Would firms be investing more, would people be consuming more, would we see more building in spite of near record vacancy rates? It's hard to see the answer to any of these questions as being yes.

The failure to recognize the last housing bubble and its risks was an act of astounding incompetence by people in policy positions and really the economics profession as a whole. The failure to see the continuing risks posed by renewed bubbles should be enough to sentence these people to the sort of hardcore unemployment experienced by people with no marketable skills.

One item that Krugman misses in comparing household debt in the U.S., U.K., Canada, and the euro zone is that the overwhelming majority of the debt in the U.S. is 30-year fixed rate mortgages. The interest rate on these mortgages will not change if long-term rates rise by 2-3 percentage points as folks like CBO predict.

On the other hand, the standard mortgage in the UK is an adjustable rate mortgage. In Canada it's typically a 5-year mortgage that has to be paid off or refinanced at the end of the period. It's easy to see what happens in these cases when interest rates rise and it's not pretty.

 

Addendum:

Since I've been asked in e-mails and twitter comments I'll present again the patented Dean Baker Bubble Bursting Formula for Central Bankers:

1) Talk

2) Regulatory Powers

3) Higher Interest Rates

As we noted earlier, a leaked State Department memo suggests that  Assistant Secretary of State for the Bureau of International Narcotics and Law Enforcement Affairs William Brownfield tried to discourage investigators from State’s Bureau of Diplomatic Se

Yet another investigative report from the Associated Press’ Alberto Arce reveals more details on the extent of corruption within the Honduran police. Arce describes how a recent U.S.-funded program aimed at cleaning up the Honduran National Police ended in dismal failure:

One by one, hundreds of police officers were called to a hotel in the capital and subjected to polygraph tests administered by Colombian technicians funded by the U.S. government. "Have you received money from organized crime?" they were asked in a series of questions about wrongdoing. "Have you been involved in serious crimes?"

Nearly four of every 10 officers failed the test in the first five months it was administered, some giving answers that indicated that they had tortured suspects, accepted bribes and taken drugs, according to a U.S. document provided to The Associated Press.

Then, despite the clear indications of serious wrongdoing, the police cleanup effort went nowhere.

By April of this year, the Honduran government said it had dismissed a mere seven officers from the more-than-11,000-member force, a vivid illustration of the lack of progress in a year-old effort aided by the U.S. to reform police in a country that's swamped with U.S.-bound cocaine and wracked by one of the world's highest homicide rates.

Some of the seven officers have since been reinstated, the minister of public security told congress.

Arce notes that recent efforts to purge the police forces of dirty cops were opposed by “dozens of officers [who] simply refused to accept a mass polygraph exam, seizing a police building until the government backed down” after 1,400 of them were suspended last week and told to take the test.

Dean Baker
Project Syndicate, June 13, 2013

Dean Baker
The Guardian Unlimited, 3 de junio, 2013
El Mono Político, 6 junio, 2013
En Inglés

On May 31 the World Bank, PAHO and UNICEF announced $28.1 million in new funding for cholera elimination efforts in Haiti. The new funding was announced following a meeting in Washington, D.C. of the Regional Coalition to Eliminate Cholera Transmission in Hispaniola. In February 2013, a $2.2 billion, 10-year cholera elimination plan was announced by the Government of Haiti, with the support of the coalition. The plan calls for $443.7 million over the first two years. Thus far, however, there have been few details of how the plan will be funded and coordinated.

In announcing the new funding, PAHO noted that UNICEF would “take lead responsibility for the operation of a national trust fund to channel resources to cholera elimination.” While the terms of reference for the national fund are still being worked out, those familiar with the discussions told HRRW that it would be run by a steering committee led by the ministries of health of Haiti and the Dominican Republic. In contrast with previous aid and reconstruction funds that have largely bypassed the Haitian government and Haitian institutions, the new fund would have the ability to directly fund the work of the Haitian government as well as international NGOs.

“Donors are looking for improved international cooperation with Haiti and this is a model they’re looking for,” said Kate Dickson, Senior Policy Advisor at PAHO. Dickson added, “it is a model that allows the respective governments, Haiti and the Dominican Republic, to actually take the lead, accompanied by a coalition at the international level.”

This would represent a significant change from previous efforts, such as the Haiti Reconstruction Fund, which was only able to disburse funds to the U.N., World Bank and Inter-American Development Bank. It also may reflect the influence of Paul Farmer, named the U.N. Secretary General’s Special Envoy on Community Based Medicine and Lessons from Haiti. Under his previous role as Deputy U.N. Special Envoy, Farmer argued that “the way aid is channeled matters a great deal, and determines its impact on the lives of the Haitian people.”

During the meeting between coalition partners and donor groups in late May, Farmer directly addressed this, in an appeal to donors:

By December 2012, only 10% of the total $6.4 billion dollars invested in Haiti had gone through national systems.  We have learned and relearned this lesson in Haiti: unless efforts are made to increase the amount of such resources to and through public institutions, the process of building them is slowed or thwarted. When we say “through”, we mean of course, that there can be local private entities, from contractors to NGOs, that wish to be part of rebuilding… Again, we are here not only to fund the national actions plans, but to do so in a way that strengthens ownership and local capacity, while accompanying local authorities and providers. This requires, as the Americans say, “boots on the ground” – not those of soldiers but of community health workers.

Nevertheless, some traditional donors, reluctant to give up operational control of their aid funds may instead opt to work outside of the national fund. This is already evident. In December, when the U.N. Secretary General announced an initiative to support the cholera elimination plan, he stated that there had already been $238.5 million committed. However, with the recent funding commitments of $28.1 million announced last week, PAHO noted that it “brings the total funds committed to support the national plans to $209.4 million, less than half the amount needed over just the next two years.”

Dean Baker
Truthout, June 11, 2013

John SchmittDemocracy, June 12, 2013