When the bubbles burst

An interesting discussion is going on over at The Oil Drum about whether Americans will be willing or able to respond to rising energy prices. Will high prices result in "demand destruction," causing people to trade in their SUV's and exurban houses for a less wasteful lifestyle? A couple of commenters suggest that even if the consumer mentality can be overcome, there may still be some huge obstacles in their way:

[Marko] If [millions of Americans] have blown their credit, and they still owe $20,000 on that SUV, nobody is going to give them a car loan to buy a replacement. Likewise, if they and millions of others are having trouble making payments on their $800,000 mortgage for a McMansion that is now worth $350,000, no one is going to issue them a mortgage for a smaller house closer to their job. In fact, they might have trouble finding a landlord who will rent to them with that kind of credit record.

[SW] I hope we are beginning to see some reality come back into the discussion regarding the impact of high gas prices. All those who have been marveling at how unaffected the consumer has been really needs to consider the fact that so many small transactions are now done by credit. This acts like a capacitor. When these expenses are inelastic, the only change that is felt for long periods of time is a gradual increase in the balance on the credit card. Not so bad when that can be periodically wiped out by refinancing the house. If and when that source of free money dries up the whole ponzi scheme crashes down.

When the levee breaks, it's a gonna be bad.