--- Michael Pollak <mpollak@panix.com> wrote:

Honest question -- doesn't large scale use of HELC mean 
the number of people who would end up with negative equity 
in such a situation would be larger than that -- that it 
wouldn't be limited to people who bought at the top but 
would also include some of those who borrowed at it?

JG: It'll certainly increase the numbers in that position, 
but in the UK, at least, it's only marginally worthwhile unless 
you've got quite a lot of equity and you're either remortgaging 
anyway, or you need to borrow a lot. Personal loans are also 
cheap, and there are no arrangement/security fees. But I really 
don't know the US market - maybe it will make more of an 
impact. 

> 3) People borrowing against their home equity. They will have
> to pay a bit more for borrowing, but it won't be crippling
> for most of them.
> 4) Maybe, just maybe, the rest of us if the result of (3) is
> a sharp fall in consumption and the economy is screwed. But
> this is far from a necessary consequence of falling prices.

MP: Aren't you leaving out the wealth effect here, James?  

JG: Yes! Maybe I'm trying to over-correct for what I see as an 
overly catastrophist approach in discussions about house prices 
(that's not a dig at anyone in particular, just my reading of 
the discussion beyond the list). Easy availablility of credit 
certainly has an effect, and I think that this will be sustained 
even if house prices fall.  But I'm somewhat sceptical that 
people are spending because they 'feel rich'. It's perhaps my 
own prejudice, but I think that the psychological accounts 
of economic activity are a bit too impressionistic. There's 
also plenty of evidence of people spending wildly because 
they know that they're going to go bankrupt, so they just 
don't care (the opposite of the wealth effect, but with the 
same consequence for spending). It's a big discussion in UK 
consumer finance because UK bankruptcy law has changed, and 
bankruptcy rates are rising sharply.

I'd sum up my position by saying that there is a bubble, prices 
are on balance likely to fall sharply, but that the overall 
impact on the economy will be more muted than is widely 
expected.

--James