Re: [Pen-l] "loss of wealth" [was: Dean Baker: Getting the most bang for the stimulus buck

[Doug Henwood <dhenwood@xxxxxxxxx>]

On Jan 14, 2009, at 6:48 PM, Jim Devine wrote:

> and Shane's reply:
> > "evaporate?" That "value" obviously never existed in reality, only  
> > on paper.<
>
> I would agree with Shane: the high stock prices and the house prices
> in (say) August 2008 were totally on paper, a matter of promises and
> expectations.

I've had this argument with Dean, who's big on the wealth effect. I'm  
not sure how the stock of (largely fictitious) wealth affects the  
flows of consumption. Mortgage borrowing and spending capital gains  
can affect consumption, but not balance sheet wealth that's mostly  
money of the mind (in Jim Grant's excellent phrase). Yes, consumption  
in the recent boom ran well ahead of income, but that was enabled by  
mortgage equity withdrawal - people can't spend cash flow they don't  
have. My own half-assed regressions show that income growth and lagged  
consumption can explain almost all the variation in consumption (r2 = . 
87). Adding mortgage debt growth raises the r2 some, but housing adds  
much less power. I've read some of the wealth effect lit and they  
don't mention mortgage debt - only housing wealth.

Doug
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