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Forgive Us Our Trespasses?
The Rise of Consumer Debt in Modern America

(Released February 2009)

 
  by Matthew Ruben  

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The Economic Crisis & Policy Recommendations

Contents

The Credit Crunch

When considering the reasons for the rise in consumer debt and the implications for the economy in general, the most interesting aspect might be that the rules of the game have dramatically changed in 2008. Stock market indexes have fallen to 10-year lows. Housing prices are down by more than 20 percent in some markets. The Federal Reserve reported that in August 2008, consumer borrowing declined by $7.9 billion, the biggest monthly drop in more than 50 years. (Garcia 2008, 2) And loans in general are less available. One clear result of the economic crisis is that although consumer debt is not likely to rapidly disappear, it is especially unlikely to continue its upward trend.

Entering 2009, the credit markets have tightened dramatically. Investors fear further repercussions in the securities markets and in the credit card market in particular, so investment in credit card backed securities has dwindled. (Garcia 2008, 5) The issuance of credit-card backed securities (the securitization of credit card debt), which averaged $8 billion a month in 2007, was $0 in October 2008. (The End of the Affair 40) The implications for credit card companies are unclear. Some analysts fear that they will take a massive hit in the next couple of years from rotten debt. (Silver-Greenberg) Additionally, at the end of 2007, one third of Capital One's loans had been sold as securities, so if there should be panic over credit card securities in the same way the mortgage-backed securities market became distressed in 2006 and 2007, Capital One (and some other credit card companies) could be severely threatened. (Morgensen)But consumers can expect higher interest rates, lower credit limits, and increased fees. And as the credit crunch plays out, with fewer incentives and outlets for borrowing, consumers are spending less. Richard Berner of Morgan Stanley was recently quoted as saying, "The golden age of spending for the American consumer has ended and a new age of thrift likely has begun." (The End of the Affair 39)

charts of consumer and financial borrowing
Chart showing trend in U.S. consumer credit and in borrowing by banks, 2000-2008

Even if Berner is correct, the likelihood that consumers will be able to start paying off their debts is also small. Although lines of credit have dried up, the economic downturn will likely leave many Americans jobless or with constricted salaries. (Dash; Bernard and Anderson) With fewer possibilities for loans, consumers may be driven more quickly into bankruptcy. Bankruptcy filings are already up, with recent filers having a lot more credit card debt. Another likely scenario is that payday lending will continue to grow in the face of credit card market tightening. For similar reasons, it's unrealistic to expect consumption to help drive a quick recovery.

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