Why $700 Billion Might Not Be Enough

When US Treasury Secretary Henry Paulson announced this week that he was ditching the plan to buy up complex mortgage-related assets, many people were surprisingly surprised. What? Wait! We gave him $700 Billion to fix this mess. How can $700 Billion not be enough?

There's no easy answer, of course, but The New York Times series The Debt Trap, published back in July 2008, is a good place to get a sense of the magnitude of this crisis.

Here's a snippet:

... As Americans have dug themselves deeper into debt, the value of their assets has started to fall. Mortgage debt stood at $10.5 trillion at the end of last year, more than double the $4.8 trillion just seven years earlier, but home prices that were rising to support increasing levels of debt, like home equity lines of credit, are now dropping.

I had to read that line over a couple times before I believed my eyes. Even as incomes were stagnating, mortgage debt in the US more than doubled in a mere seven years. Where'd we come up with that additional $5.7 trillion?

We didn't.

We aren't even saving money anymore. Our nation's savings rate, which measures the money that mom and pop sock away for a rainy day, accounted for more than 8 percent of disposable income in 1968. But, as reported by the NY Times, that same rate at the start of 2008 stood at 0.4 percent!

POINT FOUR PERCENT!

Yet another way of looking at the problem is this digital animation of a roller coaster [see inset above], which was created a couple years ago using the same data as Robert J. Shiller's index of housing prices in the US from 1890 to 2006. Be sure to watch for the year indicator to pop up in the lower right corner of the screen.


— TJ Sullivan