Posted on Wednesday, October 6, 2010
Credit for the Recovery
By DANIEL GROSS NYT
EVERY time the United States suffers a recession, trendspotters hasten to identify signs of frugality, extol the rediscovery of thrift and find evidence that Americans are finally (finally!) kicking their demon debt habit. We crack open history books to locate the anti-debt impulse in pre-revolutionary America and troll through quotation collections for ammunition. I’ve been around long enough to go through this exercise twice — first in the early 1990s and then in 2001 after the dot-com bust. Here we go again.
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Since the comprehensive, economy-wide debt bubble of the aughts burst spectacularly in September 2008, Americans, we are told, have rediscovered their inner skinflint. Indeed, the savings rate, which fell into negative territory in 2005 at the height of the boom, bounced back strongly. Through 2009 and thus far in 2010, Americans have been setting aside 5 percent to 7 percent of disposable income as savings. Web sites like couponmom.com and Groupon have attracted millions of penny-pinching users.
When the Federal Reserve reports figures on consumer credit, despite the dry prose, we conjure up visions of shoppers throwing their Visa cards into public bonfires. “Household debt contracted at an annual rate of 2 1/4 percent in the second quarter, the ninth consecutive quarterly decline,” the central bank reported last month. The outstanding balances of revolving credit accounts — i.e. credit cards — peaked in 2008 at a little less than $1 trillion, and have fallen for 22 straight months, to $827 billion in July 2010.
It’s a great story — if you believe it.
In fact, though, since the Lehman Brothers debacle in September 2008, the nations’ total indebtedness has continued its inexorable rise, some measures of consumer debt are starting to rise again and the easy-money, no-money-down culture still prevails in crucial sectors.
Oh, and a look at the data suggests that the decline in personal debt is driven less by Americans giving up on credit cards than on credit card issuers giving up on Americans.
CardHub.com, a credit-card industry site, crunched data from rating agencies and the Federal Reserve and found that in the 18-month period from January 2009 through June 2010, American lenders simply wrote off $124.1 billion in credit card balances as uncollectable. That accounts for nearly the entire $134 billion decline in revolving credit balances outstanding in the same period. And in the second quarter of this year, company write-offs were actually nearly $10 billion greater than the amount consumers paid down.
A similar dynamic may be taking place in the much larger housing-debt market. Mortgage debt has fallen for nine straight quarters — from $10.5 trillion in the first quarter of 2008 to $10.1 trillion in the second quarter of this year. But anyone who works in the industry knows that most of this decline can likely be ascribed to lenders writing off many of the loans they had heedlessly extended during the boom.
Meanwhile, as the economy slowly recovers, there are signs that Americans are rediscovering their free-spending ways. Total consumer credit, which includes non-revolving debt like car loans, has stabilized, and it rose in both June and July. It’s back to where it was in the second quarter of 2009. Collectively, we don’t seem to have run our credit cards through shredders. Mailboxes are again stuffed with credit card solicitations. Newspapers are filled with come-ons from car dealers offering zero-percent financing. The Federal Housing Authority offers mortgages on houses for as little as 3 percent down. You’d be forgiven for thinking that we’ve flown back in time to September 2006.
And, believe it or not, that’s a good thing. The economic expansion that has been going along in fits and starts since June 2009 was initially powered by government stimulus and business investment. But for this recovery to mature, broaden and persist, the greatest economic force known to mankind — the American consumer — has to get back in the game.
In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel. Money may make the world go ’round, but credit makes the gears of commerce run smoothly.
Many of our largest and most significant industries still have business models that rely on the use of debt to purchase goods and services. Unless you’re a multimillionaire, it’s difficult to make significant purchases — college tuition, a Viking stove, a Toyota Prius, computers, jewelry, a house — out of savings or cash flow from wages. The renewed willingness and confidence to spend money we don’t have is vital to the continuing recovery.
John Maynard Keynes wrote of the paradox of thrift — if everyone saves, everyone becomes poorer, because demand for goods and services will fall. Here’s another paradox: Running up consumer debt may be a moral failure and a recipe for long-term damnation, but it also contains the roots of our short-term salvation.
Daniel Gross, author of “Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation,” is the economics editor and columnist at Yahoo! Finance