August Consumer Confidence Index--Preparing for the Preliminary Number Friday

In just two days, the mid-month preliminary Reuters/University of Michigan Consumer Sentiment Index will be released for August. July saw an unexpected rise in consumer confidence, but August will surely be lower. In the last few weeks, financial markets have grown highly volatile due to the subprime mortgage lending crisis in the United States.

Why does this matter to consumer confidence? Because consumers have been tapping their inflated home equity as though it is a personal ATM. Trouble is, it isn't real equity until you have paid off your mortgage. Some in the financial world might disagree with that statement. In truth, consumers were lulled into thinking residential real estate values would continue to rise with no end in sight.

And so tapping that "purchasing power" seemed to make sense. Some people did it to pay for luxuries, others for necessities. Indeed, after 9-11 consumers were urged to shop as a patriotic act. Imagine that, reckless spending as patriotic duty. Kind of resembles the attitude toward the actual cost of the war in Iraq.

Now, many "homeowners" are actually in negative territory--owing more than their properties are worth and locked into loan agreements with interest rates that will reset higher than they can afford. And this in a historically low interest rate environment.

But these really bad loans were made because the mortgage industry has shifted from the bailiwick of depository institutions (banks, credit unions and savings and loans) to the mercurial world of non-depository lenders. Since the 1980s most regulation of mortgages has been gutted. In plain speak, mortgages became securitized--fodder for big deals on Wall Street. Local non-depository lenders and brokers had no incentive to make prudent loans; bigger was better. More was better. In this go-go environment local accountability took a back seat to closing the deal at any cost.

As the subprime mortgage debacle continues rattling global markets, credit will tighten, property values will continue to decline, foreclosures will increase and the impact will reach the sectors that sell to home owners--places like La-Z-Boy and Home Depot.

Consumer confidence? If it remains high, the folks surveyed are either in excellent financial shape or deep denial.