The Two Trillion Dollar Spree

City of debt shows US housing woe

Steve Carrigan is in charge of economic development for Stockton. He says bank loans made it a party every day.

“People went to the bank and got a loan on the increase in the price of their home. They went out and spent all that money,” he explains.

“Price of the home went up again, they went back to the bank and got another loan. They went out again and spent that money on cars and jewellery and furniture – whatever they wanted.”

With the help of the banks, Mr Carrigan says, people in Stockton “spent their house”.

But that is not how it was meant to be.

Bingo:

Professor Roubini says that even at the low end of the estimates the potential impact on the rest of the economy is massive.

“If you have a $200bn loss, that reduced your capital by $200bn, you have to reduce your lending by 10 times as much,” he explains.

“So you could have a reduction of total credit to the economy of two trillion dollars”.

The professor predicts that a reduction of credit on that scale will trigger a recession in America which could become global as the contagion spreads through the banking system worldwide.

Tell me why I should feel sorry for these specific people who are losing their homes.

No. Don’t even try.

Post-spree housing in Stockton:

Source: Library of Congress, Prints & Photographs Division, FSA-OWI Collection, LC-DIG-fsa-8a16194 DLC (reproduced per these guidelines)

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