I think these are good points:
So Long to the Wealth Effect?, by Robert J. Samuelson, Newsweek: Ours is a wealth-driven era, when huge increases in home values and (before that) stock prices make people feel richer and cause them to buy more. ... You can imagine this "wealth effect" as a powerful afterburner that's boosted the economy for roughly 20 years. ...[T]he ... story may be whether the afterburner is flaming out. Just recently, Federal Reserve chairman Alan Greenspan gave a speech suggesting precisely that. Greenspan disclosed the results of a study he had done with Fed staff economist James Kennedy. The study estimated the amount of cash that homeowners have extracted from rising housing prices (those prices are up 53 percent over five years, according to government figures). Homeowners could convert higher real-estate values into cash in three ways ... By estimating all three sources, Greenspan and Kennedy reached annual grand totals, shown on the table below. ... The housing money is extra, on top of personal income.
Greenspan and Kennedy Estimates YEAR | EQUITY EXTRACTED | % OF DISPOSABLE
2000 | $204 bil. | 2.8%
2001 | $262 bil. | 3.5%
2002 | $398 bil. | 5.1%
2003 | $439 bil. | 5.4%
2004 | $599 bil. | 6.9%
Whoa! Consumers had a lot more to spend than ordinary income, almost $600 billion more in 2004. How much of that was actually spent (as opposed to being put into bank deposits, stocks or mutual funds) is unclear. Consumer surveys cited by Greenspan suggest perhaps two thirds, a big chunk of it on remodeling. The economy has depended heavily on all this extra cash. And, before the housing bonanza, there was the stock boom. ... Economists figure that consumers spend between 2 percent and 3 percent of their extra stock-market wealth. That's also a lot of purchasing power. No one has fully explained what caused these immense wealth gains. My own oft-stated belief is that lower inflation is the main cause, because it gradually reduced interest rates. ... But there are many other possible explanations, including financial speculation. Whatever the root causes, the result has been a marathon shopping orgy. ... Could the wealth effect now subside? For stocks, it already has. ... Greenspan has warned that the rapid run-up in home prices won't go on forever. ... Growth in consumer spending would then presumably slow, he said. This need not be a disaster. On paper, the economy could compensate in many ways: more exports and fewer imports (much U.S. consumer spending went to imports); stronger business investment; extra government spending for hurricane rebuilding. ... The fading of America's wealth effect, should it occur, might be ... dull and benign. But there are grimmer possibilities. One is that many adverse forces are now converging: higher energy prices, higher interest rates and debt payments, higher inflation, falling wealth gains. ... For two decades, free-spending American consumers have anchored the U.S. and world economies. If they no longer play that role, it's an open and worrisome question of who will.
The potential solutions to the global and domestic imbalance problems have been discussed extensively here and elsewhere, so I won't try and recount them all again, but one way to summarize them is that with smart monetary and fiscal policy and gradual adjustment in the U.S. and elsewhere, we have a chance of a soft landing. But if current policies continue, the chance of a more difficult adjustment period will rise.