The benign neglect of the individual households' equity crisis

De Koning, Kees (2014): The benign neglect of the individual households' equity crisis.

Abstract

Savings are allocated over the acquisition of assets like homes, shares and bonds and government debt paper. For a home acquisition an individual household uses own equity provided by the buyer and outside equity provided by banks. Such outside equity can help to increase the volume of new housing starts, but it can also drive up the prices of all homes. The crisis of home asset prices started already in 1997 in the U.S., but accelerated in 2002 and reached its breaking points in 2005-2006 when 65% of the new outside equity was used to increase house prices rather than the volume of housing starts. From 1997 house prices were rising faster than the CPI index, while over the period 2000-2006 incomes just kept up with the CPI index. The value of savings out of the increased income levels were worth less and less in purchasing power as compared to the asset price movements. The savings depreciation factor was 34% over the latter period. Both the Houses of Congress and the Fed had a policy of benign neglect of the growing gap between asset values and incomes and savings developments.

Banks did not take the savings depreciation factor into account and undervalued their real risks to their portfolios and substantially overvalued their profits for 2005 and 2006. The mortgage securitisation process transferred the risks in a substantial manner to European savers, which did not diminish the risks of the savings depreciation factor, but only changed the providers of the savings.

This article focuses on the relationships between incomes, savings, and assets. It focuses on own and outside equity and makes a distinction between savings which help output and economic growth -economic savings- and those that don’t -financial ones

• Item Type: MPRA Paper
• Language: English
• Keywords: income depreciation factor, savings depreciation factor,financial crisis, individual households' equity crisis, benign neglect policies, quantitative easing, economic easing, bank reform, bank risk accounting, pension funds accounting
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

References

Financial crisis, economic crisis and individual households’ income and savings crisis by Drs Kees De Koning, U.K, 23rd January 2014, MPRA paper 53122, University Library Munich, Germany

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The real financial crisis: an individual households’ crisis; The case for index-linked government bonds for the Netherlands, the U.S. and the U.K., by Drs Kees De Koning, U.K. 5th August 2013, MPRA paper 48889, University Library Munich, Germany