Subprime problems signal trouble ahead, research shows

Sept. 17, 2007 — If it seems as though sub-prime mortgage loans stirred up trouble in the financial markets, just wait until debt problems spill over onto household spending. According to economists Barry Cynamon and Steven Fazzari, America’s love affair with consumption has been a big source of economic stimulus for a long time. But the party might be about to end.

Americans’ overextended wallets could trigger the most severe downturn in economic activity seen since at least the 1980s and possibly since the Great Depression. Mortgage woes could get worse thanks to easy credit. “For the past 25 years, America has experienced a period of rising consumer debt,” said Fazzari, an economics professor at Washington University in St. Louis. “Up to now the high debt levels have had a positive influence on the economy.

“We’re already seeing credit dry up in housing. But this may not affect just home building. Going forward, the inability to get home loans could affect consumer spending. It will become more difficult to shop at the rate we’re used to, and at the rate the economy has come to depend on. Consumer spending accounts for 70 percent of the economy.

“The message we all hear is that it’s OK to spend more money, it’s patriotic to buy more and that it’s perfectly normal to take on debt to do so.” Combine that pressure with a loosening of institutional constraints to accessing credit, and you wind up with the current situation. The risk comes into play because with so much debt, the source of financial instability is now in the consumer sector. “We’re already seeing what happens to the markets from a weakened mortgage market.

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