I part ways with Scott Sumner largely on the source of the 2008 surge in money demand. Scott seems to think of it as somewhat unidentifiable while I see it as a natural consequence of the subprime implosion.

In January 2008 I wrote.

A while back I suggested that smart homeowners were loading up their HELOCs before the door was shut. Turns out the door is being shut on Monday. Calculted Risk reports that both Chase and Countrywide are placing new limits on how much consumers can borrow.

Without access to Mortgage Equity can the consumer continue. Moreover, consider the on going possibility that high US consumption is being driven by a minority of consumers who have been drawing on heavily on home equity. With the door shut on those high spending consumers we could see a dramatic realignment in the US savings rate and with that a global recession.

Indeed, in the weeks after that I had a conversation with a real estate broker friend of mine on this issue. We calculated that the carrying cost of cash taken out of a HELOC was likely to be around 1% and maybe less if you found the right Certificate of Deposit. We concluded that we would not only max out our home equity lines (I had a different bank)  and stuff the proceeds in savings but he would look for anyone who hadn’t shut the door yet and get us more out.

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