Importance of home equity extraction to economic growth
A significant driver of economic growth during the Bush administration was home equity extraction,
in essence borrowing against the value of the home to finance personal consumption. Free cash used by consumers from equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period. Using the home as a source of funds also reduced the net savings rate significantly.[73][74][75] By comparison, GDP grew by approximately $2.3 trillion during the same 2001-2005 period in current dollars, from $10.1 to $12.4 trillion.[76]
Economist Paul Krugman wrote in 2009: "The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either."[77] Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years.
[78] Since GDP growth is a significant indicator of the success of economic policy, the government had a vested interest in not fully explaining the role of home equity extraction (borrowing) in driving the GDP measure pre-crisis.
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis
Greenspan Concedes Error on Regulation
By EDMUND L. ANDREWS
Published: October 23, 2008
http://www.nytimes.com/2008/10/24/business/economy/24panel.html
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