On May 17, 2017, Michael Corkery and Stacy Cowley write in The New York Times:
A New Milestone in Household Debt
In the first quarter of 2017, consumer debt rose to $12.73 trillion, exceeding its peak in the third quarter of 2008. Student loans account for 10.6 percent of that total, up from 3.3 percent in 2003, while housing’s share, though still great, has fallen back to 2003 levels.
It took nearly a decade, but debt has made a comeback.
Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse.
The Federal Reserve Bank of New York said Wednesday that total household debt in the United States had reached a new peak — $12.7 trillion — in the first three months of the year, another milestone in the long, slow recovery of the nation’s economy.
The growing debt level shows that many of the millions of Americans who struggled during the recession have sufficiently repaired their credit to qualify for loans. It also suggests a rising optimism about economic growth among banks and other lenders.
Debt can fuel consumer spending, which accounts for nearly 70 percent of all economic activity in the United States. It also allows Americans to make large investments in education and housing, which can help build personal wealth and financial stability.
Yet the borrowing peak also signals the potential for new risks to the economy.
One of the major factors behind the latest debt binge has been student loans, a mounting burden that can stifle economic growth by preventing Americans from buying homes or spending on big-ticket consumer items.
The fear is that ballooning debt from student loans — and from auto loans and credit cards — could put many Americans back into a hole, prompting a new wave of defaults, much like the one that accompanied the mortgage meltdown a decade ago.
“This is not a marker we should be superexcited to get back to,” said Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth, a liberal think tank. “In the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.”
Since World War II, total household debt had been increasing, with only a few interruptions. The financial crisis changed that steady upward march.
In late 2008, household debt began a decline that would last for 19 consecutive quarters, an unprecedented period of deleveraging during which many Americans shied away from new borrowing. Total debt began to rise again in 2013, finally hitting a new high in this year’s first quarter.
There is reason to believe that borrowers should be able to better manage their debt now than they did during the financial crisis. The nation’s debt load is reaching new heights at a moment when the economy is expanding, a dynamic that makes the latest peak in borrowing less worrisome to economists.
And households today are borrowing differently than they did nine years ago. Student loan debt, driven by soaring tuition costs, now makes up 11 percent of total household debt, up from 5 percent in the third quarter of 2008.
By comparison, mortgage debt is 68 percent of total debt, down from 73 percent during the same period. The household debt figures are not adjusted for inflation.
Student borrowers today owe $1.3 trillion, more than double the $611 billion owed nearly nine years ago. About one in 10 student borrowers is behind on repaying the loans, the highest delinquency rate of any type of loan tracked by the New York Fed’s quarterly household debt report.
The student loan market is nowhere near the size of the $8.6 trillion mortgage market, making student borrowing less of a threat to the global financial system than the bad housing loans that touched off the financial crisis in 2008.
But there are similarities in how student loan debt — like mortgage debt a decade ago — has managed to pile up.
The Federal Reserve Bank of New York said Wednesday that total household debt had reached a new peak — $12.7 trillion — in the first three months of the year. CreditBrendan Mcdermid/Reuters..
One idea underpinning the mortgage boom was that homeownership was a clear-cut route to building wealth. That notion was shaken by the housing collapse, which left millions of Americans in foreclosure and their finances in ruins.
Students have gone deep into debt in the belief that a college degree will eventually lead to a higher income. But many students have graduated into a job market where wages have been rising slowly, leaving them with more debt than they can pay off.
Economists are now unsure about how this mountain of student debt will affect the broader economy. Unlike mortgages, student loans cannot typically be shed or restructured, which means that more Americans are shouldering a type of debt that could weigh them down for the rest of their lives, preventing them from buying homes or starting businesses.
“Student debt is a different animal with different rules,” said Diane Swonk, founder of DS Economics in Chicago. “It has some good effects, but not always.”
Alyssa Pascarosa, 26, owes $100,000 related to the bachelor’s degree in sociology she received from the University of Pittsburgh in 2013. The debt shapes nearly all of her financial choices. Ms. Pascarosa initially planned to attend law school but changed her mind after realizing that pursuing that career path would double or triple her debt load.
Instead, Ms. Pascarosa moved back in with her mother in Easton, Pa., where she works as a graphic designer.
“I would like to move out at some point soon,” she said, “but with my loans, I can’t justify spending money on rent.”
Economists have found signs that high student debt levels have contributed to a slowdown in young adults’ household formation and a decline in early homeownership.
There are many benefits, of course, to the boom in student lending. More Americans now have college degrees, which will probably increase job opportunities and wages over time.
Workers with a four-year college degree earn significantly more than those without one, in aggregate. And borrowing money to obtain a college degree often proves to be a better investment than taking out a mortgage to buy a home. But how that plays out can vary widely in individual geographic areas and career fields.
Student loans are not the only area in which debt has grown rapidly.
The New York Fed report also shows how growth in auto lending over the past decade has made up for slower mortgage lending. Auto loans totaled about $1.1 trillion, or 9 percent of all household debt, in the first quarter of 2017, up from 6 percent in the third quarter of 2008.
Defaults have crept up in auto loans, one of the few sectors in which lenders were willing to extend credit to subprime borrowers after the 2008 crisis.
Mark Zandi, chief economist at Moody’s Analytics, said defaults on student and auto loans were a “financial blemish” on otherwise healthy household balance sheets.
“It is not an existential threat to households and the economy,” Mr. Zandi said. “It is an area where there is some stress.”
More broadly, the economic picture looks far less precarious than it did in late 2008. The amount of monthly income that Americans must spend paying off their debt is smaller, and employment is flush.
That made last month feel like an opportune time for Caitlin Farrell, 34, and her husband to buy their first home, a 1,500-square-foot, two-bedroom house in Sacramento. Ms. Farrell, who works as an education policy researcher, got her home loan from SoFi, a start-up online lender that moved into the mortgage market last year.
“We had been renting and moving all through our 20s,” Ms. Farrell said, “and now seemed like the right time to get in.”
The fundamental reason for high levels of usurious consumer debt (borrowed monies with interest to purchase consumption products and services, not productive capital asset formation investment) is Americans are struggling to attain and retain a “middle class” lifestyle. Because they have insufficient income, Americans go into personal unsecured and secured debt to satisfy their consumption wants and needs.
The fundamental problem is insufficient income to pay for the consumption wants and needs of the vast majority of Americans. Forget about saving for the future, the vast majority of Americans can barely make ends meet on a week-to-week or month-to-month basis. They do not possess the ability to save but still want to satisfy their consumption wants and needs and thus go into unsecured and secured debt ala credit cards, automobile loans, student loans, home mortgages and home equity loans.
The challenge is how do we reform the financial system so that EVERY American can earn an income sufficient to enable them to satisfy their consumption wants and needs while building a wealth-creating capital asset estate?
Fundamentally, that means they need a second income source other than a job. They need to become wealthy through acquiring OWNERSHIP in future wealth-creating, income-producing capital asset formation simultaneously with the growth of the economy, without the requirement of “past savings.”
To become wealthy, without dependency on inherited wealth (past savings) or denying their consumption wants and needs and saving, requires capital credit debt. But unlike consumer debt, which does not generate income and requires another source of income to pay the debt, capital credit debt is based on the logic of corporate business finance.
Capital acquisition takes place on the logic of self-financing and asset-backed credit for productive uses. People invest in capital ownership on the basis that the investment will pay for itself. The basis for the commitment of loan guarantees is the fact that nobody who knows what he or she is doing buys a physical capital asset or an interest in one unless he or she is first assured, on the basis of the best advice one can get, that the asset in operation will pay for itself within a reasonable period of time — 5 to 7 or, in a worst case scenario, 10 years (given the current depressive state of the economy). And after it pays for itself within a reasonable capital cost recovery period, it is expected to go on producing income indefinitely with proper maintenance and with restoration in the technical sense through research and development.
Still, there is at least a theoretical chance, and sometimes a very real chance, that the investment might not pay for itself, or it might not pay for itself in the projected time period. So, there is a business risk. This is why the lender has no reason to loan unless it has two sources of repayment. In addition to determining that the investment is viable and that the business corporation is credit worthy and reliably expected to make loan repayments, there needs to be security against default. Thus, for the lender to make the loan the borrower must provide the security.
On a large scale, there is a path to solve the security issue, that is, the risk can be absorbed by capital credit insurance or commercial risk insurance and reinsurance. Thus, in order to achieve national economic democracy, we need a way to handle risk management in finance by broadly insuring the risks. Such capital credit insurance would substitute for the security demanded by lenders to cover the risk of non-payment, thus enabling the poor and others with no or few assets (the 99 percenters) to overcome the collateralization barrier that excludes the non-halves from access to acquiring wealth-creating, income-generating productive capital.
One feasible way is to lift ownership-concentrating Federal Reserve System credit barriers and other institutional barriers that have historically separated owners from non-owners and link tax and monetary reforms to the goal of expanded capital ownership. Removing barriers that inhibit or prevent ordinary people from purchasing capital that pays for itself out of its own future earnings is paramount as an actionable policy. This can be done under the existing legal powers of each of the 12 Federal Reserve regional banks, and will not add to the already unsustainable debt of the Federal Government or raise taxes on ordinary taxpayers.
You see, commercial banks of issue can create money by accepting bills of exchange and issuing promissory notes. If money is created properly, that is, only by issuing promissory notes to discount bills of exchange with real value (new viable capital formation projects), the money supply for an economy will be elastic (that is, expand and contract as needed), stable, uniform, and asset-backed.
The amount of loans a commercial bank of issue can make is, in theory, limited only by the present value of financially feasible capital projects in the area served by the bank, and on which bills are drawn and offered to the bank.
We need to free the system of dependency on Wall Street and the accumulated savings and money power of the rich and super-rich who control Wall Street. The Federal Reserve System has stifled the growth of America’s productive capacity through its monetary policy by monetizing public-sector growth and mounting Federal deficits and “Wall Street” bailouts; by favoring speculation over investment; by shortchanging the capital credit needs of entrepreneurs, inventors, farmers, and workers; by increasing the dependency with usurious consumer credit; and by perpetuating unjust capital credit and ownership barriers between rich Americans and those without savings.
The Federal Reserve Bank should be used to provide interest-free “pure” capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today — management and banks — that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk would be taken by the commercial credit insurers, backed by a new government corporation, the Capital Diffusion Reinsurance Corporation ((ala the Federal Housing Administration concept), through which the loans could be guaranteed. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.
The Federal Reserve Board is already empowered under Section 13, paragraph 2 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded capital ownership opportunities for all Americans.
The challenge we face is to free economic growth from the slavery of past savings by abolishing any fractional reserve requirement and providing that all bills of exchange accepted for pure credit loans made for financially feasible qualified capital projects be immediately rediscounted at the central bank. This would effectively result in 100 percent reserves of cash or cash equivalents in the form of commercial bank demand deposits at the central bank. The other use of past savings (the privy of the already wealthy ownership class), as collateral for pure credit loans, would be obviated by the use of capital credit insurance and reinsurance.
Pure credit financing of new capital and the replacement of traditional collateral with capital credit insurance and reinsurance would radically reduce dependency on existing accumulations of savings owned by the top 1 percent. This would allow rapid economic growth in which the poorest of the poor as well as everyone else to take advantage of equal ownership opportunities in the future. These opportunities, construed as a “new right of citizenship,” would be secured by means of the monetary and tax reforms offered by the Center for Economic and Social Justice’s (www.CESJ.org) proposal for a “Capital Homestead Act.”
The fact is money power rules. When money power is broadly distributed in the hands of the citizens, not the politicians or bankers, the people shall rule and the people shall be free of dependency on usurious consumer debt with their income rising simultaneously with the growth of the economy propelled by “consumers with money” (the people) wanting to satisfy their consumption wants and needs.
The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.
Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.
