The Case/Shiller index of house prices announced this morning for the second quarter registered its largest loss ever, 3.2%. The lower grade ABX indices tumbled further as defaults spiked in July. Sob stories about people who can’t sell their houses (can’t mostly means unwilling to lower price expectations sufficiently) are a daily feature in the newspaper. Credit card defaults rose significantly in the first half of 2007, and in June and July we see credit card debt rising at a rate not seen since the last recession.

The brutal facts are that we have a large segment of people whose lifestyle has been funded by debt. But now their “equity” is gone, either lost to depreciation or just spent. They are going to have to change that lifestyle, often dramatically. So far, they’ve just switched to the plastic, but that’s a desperate strategy given the cost of credit card debt.

No amount of government bailouts of existing debt is going to re-inflate the bubble. Lenders have been decimated and are in full retreat. It will be a long time before the mania returns. Consumption must fall, the savings rate must go positive even as incomes decline, giving a “double whammy”. My guesstimate is that consumption needs to fall by 20-25% in real terms. It is hard to imagine the consequences of such a crash. But on the other hand, everywhere I see extremes of extravagance, just like in the 1920s. Huge, powerful cars, enormous houses, more superyachts than ever before, luxury goods of every kind being sold in quantities to the aspiring nouveaux riches. It’ll be a doozy (Deusie). Yes, I’m a curmudgeon and not ashamed of it.