10 Aug Consumer debt is at an all-time high. Should banks be worried?
Our previous article entitled, “The Galloping US Economy” tells about the present bullish condition of the US economy which has been seen to shine for the next several years given its present dynamics. That article was based from “The US economy suddenly looks like it’s unstoppable” by Jeff Cox of CNBC, published on 01 June 2018.
However, an article published on July 30, 2018, by the AMERICAN BANKER, as written by Mr. Kevin Wack, although did not directly paint an uglier picture, tends to somehow becloud the sunny atmosphere seen by Mr. Cox of CNBC. In the spirit of fairness and fairplay below are excerpts from “Consumer debts is at all-time high, Should banks be worried?” :
September 2008 was one of those rare interludes when the world shifts beneath your feet. Markets froze. Fabled banks stood on the precipice. The U.S. government, after initially standing by idly, brought out its bazooka. After a generation of deregulation, it genuinely seemed possible that the U.S. banking system would be nationalized.
The crisis had immense economic and political consequences over the following decade. It helped fuel the rise of the Tea Party, and later, both Trumpism and the anti-corporate left. It led to new regulations that transformed banking into a safer, far more boring industry. And it wreaked havoc in tens of millions of American lives. Foreclosures became an epidemic. College graduates were forced to move into their parents’ basements. Aging workers had their retirement plans upended.
But 10 years later, what’s remarkable is how little the financial crisis changed Americans’ relationship to debt and savings. We still borrow more and save far less than prudence would dictate.
U.S. household debt, which declined between 2008 and 2013, has rebounded sharply. By the first quarter of 2018, it was at an all-time high of $13.2 trillion. The composition of our debt has changed, and we’ve been better able to manage our obligations, thanks in substantial part to an extended period of low interest rates. But the crisis did not teach us a lesson about the perils of borrowing too much.
In December 2017, the personal savings rate dropped to 2.4%, its lowest level since the debt-fueled boom of the mid-2000s. “In a much-discussed Federal Reserve survey that was published last year, 35% of U.S. adults reported that they would not be able to pay all of their bills if faced with a $400 emergency. Given that context, one can only hope that the next downturn will be far less severe than the last one, because Americans are again exposed.”
“Ten years ago, a lot off the problems economically for households were sort of covered up in debt,” said John Thompson, chief program officer at the Center for Financial Services Innovation. “And it sort of feels like that’s starting to happen again.”
Myths about millennials: The Great Recession was particularly hard on Americans who were coming of age in the late 2000s. Those who’d just graduated from college were saddled with staggering levels of student debt and facing a weak job market. Those who hadn’t finished college fared even worse, since they were competing against their better educated peers for low-wage work that was in short supply.
A 2017 survey by TransUnion found that 74% of millennials who did not already have a mortgage planned to buy a home eventually. “A set of specific circumstances has resulted in a generation that has postponed the typical milestones of adulthood — job, home, marriage, children — and all the purchases that go along with them,” said a TransUnion report on millennials.
The national homeownership rate plunged from 69% in 2006 to 63% in 2016, a trend driven by the millions of Americans who could no longer afford their bubble-era mortgages, the tighter lending standards that emerged after the crisis and the rise of single-family rental homes. In the first quarter of this year, the U.S. homeownership rate was back above 64%, which was almost exactly its 30-year average between 1965 and 1995. Looking ahead conversations about U.S. consumer debt often focus on whether another bubble is forming, and whether the next crisis is around the corner.
- Right now, there is no sign that the sky is about to fall. Mortgage-related loans, which make up about 71% of the nation’s consumer debt, no longer rest on the assumption that house prices will rise forever. Delinquency rates remain low across various asset classes thanks in large part to a strong labor market. And as a percentage of disposable income, household debt is near its average from 1990 to 2018.
- The big question is what will happen to consumer debt levels as the Fed continues to raise interest rates. In an optimistic scenario, Americans who have been unable to earn a decent return on their savings over the past decade will start to sock away more of their earnings.
- In a gloomier future, U.S. consumers will continue to borrow freely even as rates climb. The ability to make their debt payments will erode with time, which will leave them vulnerable to the next economic shock. And then the same cycle that has unfolded over the last decade will begin again.