From the New Republic:
The bursting of the housing bubble, which brought down the banking industry because banks were so heavily invested in financing residential real estate, had three effects that relate to the paradox of thrift, each amplified by the accompanying implosion of the stock market bubble. First, the decline in house and stock values reduced household wealth without reducing people’s debt burdens, because debt is a fixed expense rather than a percentage of the value of the assets that secure it. (That’s why so many mortgages are “under water”: the unpaid balance of the mortgage exceeds the market value of the property that secures it because the value has fallen but not the debt.) So people felt poorer and therefore more vulnerable to economic adversity, and they reacted by reducing their consumption, thus saving more.
Back and forth from the Becker - Posner Blog
What is the Paradox of Thrift?
