Reduced Home Equity Spending ENORMOUS!
Paul Kasriel has a piece on the wealth effect. It only relates to a part of the wealth effect, where people pull home equity to spend on other things. The wealth effect says that as we see our paper wealth fall, we tend to spend less.
I am not sure how much the reduced spending from home equity loans is about the wealth effect and how much is about the reduced ability to borrow, and I tend to think a great deal of it is about the latter.
In any event, the reduced home equity loans are enormous, from "at an annualized rate, active MEW peaked at $576 billion in the second quarter of 2006. Active Mew has slowed to only $114 billion in the first quarter of this year."
If the total economy is something like $13 trillion, that alone is a 3.6% decline in available spending by consumers.
Better put a few notches into the belt for tightening...