There has been a slow, steady shift in consumer sentiment towards debt since the beginning of the year. For quite some time, many were debating whether it was even happening. At Thanksgiving, the first real hints of what was coming could be found in poor turnout for pre-Christmas sales. Still, most assumed consumers would come through at Christmas like "they always do". Except this time they didn't. Christmas Retail Sales Disappointed in spite of bigger than ever discounts. After Christmas sales disappointed as well.



Consumers Are Retrenching



It's now clear to everyone that Consumers Are Retrenching As The Economy Weakens.



Joi Freemont, a dentist in suburban Atlanta, doesn't have to look further than her appointment book to tell that people are worried about money.



Patients who used to get their teeth whitened all the time "now want to think about it a bit," she said. Braces? "People were getting them for the kids, for themselves, but now they're waiting," she added. And when people get cavities, they have their fillings done one a month, not five or six at a time, she said.



As a result, Freemont and her husband are worried their income could drop and are trying to be more prudent with their money. They're monitoring spending more closely and continuing to whittle down their credit card balances and her dental school debt, she said.

And so the consumer balance sheet repair meme continues to grow. As those who have read Five Things over the past couple of years know, this is not a behavior that began in August or September as the credit crunch began to manifest, it's something that has been building for years.



Consider talk show host and television personality Dave Ramsey. Chances are pretty good that by now you know who Dave Ramsey is, but just in case, he's the host of a popular, widely-syndicated show, "The Dave Ramsey Show," that is heard on the more than 300 radio stations and seen on Fox Business Television.



Ramsey has been talking about the evils of debt and the virtues of debt-free living for more than a decade. In fact, his career began in 1992 when he began selling books on financial health following his own personal bankruptcy crisis in the late 1980s. But only recently has Ramsey really been able penetrate the mass public's consciousness. Why? It's not because Ramsey suddenly improved his message, it's because social mood finally reached a point where his message is not just acceptable but sought out.



The psychological factors that have made Ramsey a household name are the same factors now working against the ability of the Federal Reserve and the government to stimulate credit demand.

U.S. consumers pull back on spending, worry more about debt as economy weakens

Consumers are cutting back

US consumers worry about debt, pull back on spending

Consumers pull back as economy weakens

Americans buckle up for slowing economy

Empty Malls as Economic Fears Spread

Americans tightening their belts

Consumers now spending less, worrying more



More consumers start to show financial restraint

Changing Attitudes Are Now News

Faced with growing competition from cheaper rivals, Starbucks Corp. is selling small cups of drip coffee for $1 with free refills as part of a test in its hometown.

Homeowners just Walking Away

WHAT do banks call it when a troubled borrower abandons her home, sending them the keys? “Jingle mail.”



And what do they call it when an irate borrower abandons his home, yanking electrical outlets from walls, leaving faucets running and otherwise trashing it on the way out? “Taking the inside of the house with you.”

From the Wachovia conference call: “ Part of one of the challenges is, and we've mentioned this before, a lot of this current losses have been coming out of California and it's -- they've been from people that have otherwise had the capacity to pay, but have basically just decided not to ... "



This echoes the comments of BofA CEO Kenneth Lewis last month: " There's been a change in social attitudes toward default," Mr. Lewis says. ... "We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes. "

Should People Just Walk Away?

If Americans immediately walked away from negatively amortized mortgages, the crisis would end much faster. Here’s why:



1. Stressed homeowners who walk away from their properties can move into a rental and cut their monthly expenses, easing financial stress. Yes, their credit would be wrecked for a few years, but not as severely as if they foreclose or declare bankruptcy.



2. Financial institutions could unload properties more quickly because they would gain control faster than in foreclosure proceedings. By the way, this is already happening to some degree. The less time a home spends in limbo, the less likely it is to be damaged.



3. Here’s the really painful part: home prices would plummet, forcing additional homeowners to consider unloading properties. This was going to happen anyway, but bailouts and lower interest rates will just prolong the whole mess.



4. Financial institutions would be forced to come clean much faster than to date. Trust would be restored in surviving institutions once the carnage ended.



5. The economy will go into a full recession too fast for the Fed to lower rates and for politicians to enact wasteful bailouts.



6. Once home prices reach a low enough level, investors will snatch properties up and offer them as rentals.



7. This will stabilize the home market and offer a steady income source for property investors. (Currently, home prices are too high for leasing purposes.)



8. After the initial pain, the economy should begin its rebound.



Of course, few economists will ever make a suggestion such as this. Why? It sounds defeatist. It’s cruel to homeowners. It’s anti-American. Financial institutions would howl in protest.

Throwing Away Money

The secular trend towards consumption has peaked.

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