Paul Krugman with a sobering assessment of consumer behavior in the wake of the credit crunch. The simple assumption is that consumers that previously leaned on rising home values to tap equity are now, as those credit lines dry up, leaning on their credit cards. Which means they’ll be overextending themselves in (at least) two areas now. What also probably isn’t realized by many of them is that credit card companies will be reacting to the credit crisis by raising interest rates.
The a lesson in here, as well a larger looming danger. The lesson is to keep in mind that in all of the finger-pointing surrounding the bailout bill and the mortgage crisis, lawmakers will be loathe to admit that the American consumer played a large part in this. Lots of people willfully and knowingly entered into mortgages they couldn’t afford, and as this piece shows, there are a lot of subscribers to lifestyle inflation who still aren’t able to rein it in and tighten up. I imagine some have dug too deep a hole to simply climb out by cutting back.
The danger is that all of this is percolating on the outset of the Christmas season, meaning shoppers will have to pull back their spending, leading to a bad holiday retail season, leading to further economic woes.