We have three related but somewhat distinct economic problems right now.
1. The first is a liquidity problem. Lenders are reluctant to lend money because they aren't sure who will be solvent tomorrow, so they may never see their money again.
2. The second is a solvency problem. Lenders should be reluctant to lend money because more than a few of their customers actually are or soon will be insolvent.
3. Finally, even after the first two problems are dealt with, there will remain the wealth problem. We aren't actually as wealthy as we thought we were 18 months ago. A significant fraction of our supposed wealth consisted of overleveraged homes and, in turn, financial instruments overleveraged on top of the overleveraged housing assets.
An important empirical question is how much of the pseudo-wealth that came into theoretical existence during the Bubble has already been consumed? This has implications for forecasting upcoming business activity.
For example, I never thought the increase in valuation of my house was real. For family reasons, I was in no position to sell it and move some place cheaper. And I always figured the bubble would burst eventually. So, I didn't spend the increase in home equity as if it were real money. For example, from 2001 through 2008, I can only recall paying for hotels or motels for 16 nights of family vacation, or an average of two per year. (I went tent camping about the same amount.)
So, I can't radically reduce my expenditures on hotels due to the Crash, because I wasn't spending much on them during the Bubble. If everybody had behaved like me, the oncoming crash in the vacation industry would be a lot less severe because the industry would never have expanded so much.
On the other hand, I suspect that my frugality in this regard was anomalous for Californians over this period. A lot of people took a lot of vacations with money that they thought they had, but didn't really, paying for them with home equity loans or putting them on their credit cards, expecting to be bailed out by the ever-rising value of their homes.
Granted, some expenditures really are investments. For example, two months ago I bought a second computer screen, a 24 inch giant, to work in tandem with the fast laptop I bought back in February. Together, they have greatly increased my productivity. (Where is the tangible evidence of that increased productivity, you might ask? Be patient. You'll see...)
But vacations are at the opposite pole of consumption v. investment -- they're gone.
Has anybody estimated how much of the Bubble wealth got spent?