NY Fed President Dudley Thinks A New Housing Bubble Is A Perfect Cure For Soft Retail Sales

In general, most people would agree that the housing collapse of 2008/2009 was a negative event in U.S. history.  A combination of misinformed regulations from Washington D.C., low interest rates, poor underwriting standards that allowed for, among other things, the idiotic "cash out" mortgage, and an insatiable demand for securitizations drove one of the biggest asset bubbles in history which almost brought down the entire global financial system.

But, at least one person, namely New York Fed President Bill Dudley, thinks that a repeat of the 2008 mortgage crisis is exactly the cure for America's stagnant retail sales.  Speaking at the National Retail Federation's annual convention in New York, which was undoubtedly full of perplexed retailers wondering why their store traffic remained so weak amid Obama's stunning "economic recovery", Dudley intimated that the cure for weak retail sales was a return to 2006 practices in which debt thirsty Americans repeatedly withdrew every dollar of equity in their homes to fund their trips to the mall.

“The good news is that, while the current expansion is quite old in chronological terms, it is still relatively young in terms of the health of household finances,” Dudley said in a speech to the National Retail Federation.


“Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to economic growth,” Dudley said.


Homeowners may have overlearned the lessons from the housing boom and bust, the New York Fed President said.


Even though home values have risen over 40% since 2012, housing debt has stayed virtually flat, he said.


“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” and people are leaving the wealth generated by rising home prices “locked up” in their homes, he said.

Sure, just forget that the last cycle resulted in millions of personal bankruptcies, short sales and ruined personal credit scores...we're sure this time will work out much differently.

Dudley continued by noting that at the "height of the boom, annual consumption was being supplemented by around $400 billion in cash flow from debt, much of it collateralized by housing."  Apparently he is convinced that levering up your personal life to such an extreme level that you couldn't possibly survive even a modest economic blip, all so you can buy just 3 more pairs UGGs from the mall on that brand new credit card with a $500 limit, is a brilliant idea.

In order to be able to assess the evolution of household finances more precisely, we worked with Equifax—a major credit bureau—to create a new database that tracks the credit files of a random sample of households over time.  From this consumer credit panel data, we conclude that between 2004 and 2006, households were increasing their cash flow by over $200 billion a year by borrowing against their housing equity collateral.  They supplemented that with another $185 billion through non-mortgage borrowing.  So, at the height of the boom, annual consumption was being supplemented by around $400 billion in cash flow from debt, much of it collateralized by housing.

Houses as ATMs


Finally, a perplexed Dudley asks "why has household behavior with respect to housing debt apparently changed so much?"  Could it be that Americans actually learned a lesson from their financial ruin just 8 years ago...a lesson the Fed certainly wishes they would promptly forget?  Unpossible.

Home Equity