Here's the column in Sunday's NY Times "Viewpoint" by Louis Uchitelle, "Sky-High Stocks Breed Debt, Sowing the Seeds of a Slump":
Pretty long, but encouraging that some mainstream thinking is beginning to resemble what we have on this thread.
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STOCK prices, as everyone has heard, are too high, overvalued, in bubble territory, vulnerable to a crash. Fair warning has been abundantly served. But fair warnings came in similar abundance before each of history's financial panics. And few people got out of the way in time. This column is a fresh contribution to the fair-warning literature—a fresh appeal to beware of the growing addiction to stocks.
More than 24 percent of the nation's household wealth is now invested in stocks, up from 10 percent at the time of the 1987 crash. Rarely if ever has the Federal Reserve recorded a higher percentage. And many Americans believe that the economy must weaken for standard reasons—rising unemployment, less consumption, a spike in oil prices—before the market will react and fall. They do not see that the causal chain can run in reverse: A scare or panic collapses stock prices, and then the crash shrinks the economy.
"People think that scares to the market can't be sustained as long as the economy holds up," said Richard Curtin, director of consumer surveys at the University of Michigan. "If prices drop, as they did last fall, the belief is they'll come right back up."
But more than ever, Americans are using the stocks they own to finance the spending that keeps the economy afloat. The harnessing of stock portfolios to this task, diluting the market's role as a repository of savings, is taking several forms, one of them evident in Cincinnati, among many other cities.
DRIVE out to the Fifth Third Bank's Madeira branch, near an affluent suburb, and talk to Dianna L. Grubenhoff, the branch manager, who has just been crowned by the bank as the "queen of Ioans" for making $17.9 million in home eq uity loans last year, more than at any other branch. The loans are going mainly to people with ever richer stock portfolios, Ms. Grubenhoff said.
These rich portfolios make the borrowers more creditworthy in the eyes of the bank. Rather than sell their stock and pay a capital gains tax, the borrowers prefer to take out home equity loans to pay for new cars vacations, second homes, college tuition, new clothing. Wages that once went into savings now service the loans, the thinking being that rich stock portfolios already provide for a comfortable future retirement.
"The big jump in this sort of lending has come only in the last two years," Ms. Grubenhoff said.
If stock prices were to plunge, Fifth Third Bank anticipates that its borrowers would repay loans by selling stock and again put aside money to replenish savings. Contrary to accepted wisdom, the falling market, by extinguishing consumption, would definitely weaken the economy.
Visit, too, almost any Wall Street investment house, or the hundreds of banks that now make loans to people who deposit stock as collateral. These loans, once mainly a source of credit to buy more stock, are now widely available for any sort of consumer spending. The loans are often equal to a small enough percentage of the collateral that stock prices would have to decline by more than 20 percent before the lenders demanded repayment or sold the stock
That almost happened last fall, when Russia's debt crisis panicked the market and the Dow Jones industrial average fell by nearly 20 percent before rebounding.
IN another growing practice, one that is hard to document, people are borrowing on their credit cards to invest in stocks. These gamblers count on rising stock prices to pay off the debt and yield a profit. "It is certainly a dangerous way to use credit card debt," said David Eyles chief credit policy officer of Fleet Financial Group.
What no one has quantified is the role of the stock market in supporting the loans that finance the spending that keeps the economy strong. But Government data hint at the market's growing importance. With more than $500 billion in new home equity loans issued over the last two years, only 56 percent of the value of all household real estate is now unencumbered by debt, compared with 66 percent in the late 1980's.
The national savings rate, as measured by the Government. has declined to zero, meaning people are spending beyond their income. But that leaves out the stock market. Two new studies find that if capital gains from the sale of stock in recent months were added to family income—a calculation the Government does not make —then income would exceed expenditure by an ample amount. Huge sums from these stock sales are being channeled into down payments to buy homes, driving up home prices in the process, according to Kenneth Rosen, a business school economist at the University of California at Berkeley.
If stock prices collapse, he argues, housing will be hurt, too.
The Federal Reserve, of course, can again head off damage to the economy by lowering interest rates. The Fed did that last fall when lending started to dry up, and the stock market rebounded in response.
But how often can the Fed go to the well? There is only so much room between today's already fairly low interest rates and zero. Counting on further rate cuts to sustain growth in an economy increasingly dependent on high stock prices is a risky and dangerous game.
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