15 October 2008

Three graphs relevant to the economic crisis

These graphs are from an article written two years ago, presciently entitled "Housing Bubble Bust Will Take Down the Global Economy."

Note especially the time scale on the x-axis. These data encompass a period of over 50 years.

The top graph shows that personal income minus personal expenditures (for goods/services, and housing) was ever-so-slightly positive for decades, but that about 10 years ago it turned negative, and Americans as a whole were spending more than they earned.

The lower graph shows how it is possible to spend more than one's income. The graph turned negative in the 1990s as home equity ballooned with the rise in home prices. In response to this, homeowners began to extract equity from their homes and redeploy for other purposes, to the tune of hundreds of billions of dollars each year. This graph ends in 2005, which precedes the subsequent tsunami of subprime lending.

The bottom graph (from another source, which I've lost) shows that bubble of house prices. This graph extends for over a century on the horizontal axis. Obviously there have been other house booms and busts, but the scale of this most recent one is mind-boggling. It's not surprising that the homeowning public thought they were rich and started to borrow against that equity.

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