Fueling Consumption

Some of you will have a hard time believing that the excerpt below was written by a real, live honest-to-God economist, especially the part which I highlighted. Others will have no trouble believing it at all because, like me, you know that economists are by and large complete and utter idiots. It
was written by Dean Baker at Beat The Press.

The housing bubble was generating around $1.2 trillion in demand that disappeared when it collapsed. Half of this was in residential construction and half was in consumption driven by bubble generated home equity.

He doesn’t go explain that latter bit. It would be accurate if the consumption was based on people selling those homes to extract the increased “home equity” in the form of cash in hand and then spending that cash, but for the most part it was people refinancing to exchange that increased equity for more debt. The consumption was driven, actually, by increased debt which used increasing home prices as a basis for “securing” the debt.

There was no increasing home equity fueling that consumption, because the portion of rising home prices which was used for consumption was offset by debt and was no longer equity at all. Equity cannot “fuel consumption” unless the asset is liquidated. The consumption to which Baker refers was fueled by debt.