Nouriel Roubini blog story concludes that:
“… In conclusion, there are significant and structural differences between the housing bubbles in the US and those in the UK, Australia and New Zealand: 1) monetary policy responded early on to the housing bubble in UK, Australia and New Zealand and did not allow it to fester for too long and thus achieved an economic soft landing; while in the US the Fed let the bubble to grow without bounds, thus guaranteeing a harder landing; 2) UK, Australia and New Zealand experienced positive terms of trade shocks while the US experienced sharp negative terms of trade shocks; 3) US households savings are negative while they were mostly positive in the other three countries; thus negative wealth effects from housing and binding borrowing constraints will have a larger impact in the US than in the other three countries; 4) exotic and monster mortgages and very lax lending standards were more prevalent in the US than in the other three countries; and thus the recent and coming repricing of these mortgage (about $2 trillion between 2006 and 2007) will have significant debt servicing implications.
Considering this overall evidence it is clear why the UK, Australia and New Zealand achieved a relatively soft landing of the economy in spite of a relative hard landing of their housing market. The US instead is much more likely to experience a twin hard landing: that of housing is already and clearly occurring; that of the broader economy is well underway and very likely to lead to a recession by early 2007…”.
I would agree that this time around we should worry more for reasons mentioned by Nouriel Roubini plus:
- US consumer is a consumer of the last resort, so expectations that her confidence might erode will create global adverse expectations, which cannot be said in the case of NZ, UK or AUS.
- Keep in mind well known estimates in Kennedy, Greenspan (equity extraction raised US consumer spending by 425bn annually on average in 2001-2004 compared with 177 bn in preceding four years) and results by Fed economist Lansing. His simple model which delivers 89% R2, says that one should expect an increase of US consumer saving when ratio of housing wealth to income falls, unless at the same time equity wealth goes up enough or long term rate go down enough. While corporate profits share in world GDP went up, and it is a clear structural change induced by globalization, which at the same time reduced the workers bragining power (see Freeman’s great doubling), this will probably not be enough to convince investors that stock indices should test new highs when housing market is tanking at the same time. So in order to encourage US consumer to maintain (unsustainbable in the long run) low savings would be a sizeable decline in long-term interest rates in the US.Â Is it feasible, markets and time will bring the answer, but I do share Lansing concern:
“…The decline in the U.S. personal saving rate and the dearth of internal saving raise concerns for the future. In coming decades, a growing fraction of U.S. workers will pass their peak earning years and approach retirement. In preparation, aging workers should be building their nest eggs and paying down debt. Instead, many of today’s workers are saving almost nothing and taking on large amounts of adjustable-rate debt with payments programmed to rise with the level of interest rates. Failure to boost saving in the years ahead may lead to some painful adjustments in the future when many of today’s workers could face difficulties maintaining their desired lifestyle in retirement … “.
- So the US consumer should save more for her own sake, and the housing slowdown should speed up this decision.