Not Passing Out Credit Like Water Holds Back Economic Recovery

A new report out today from the Federal Reserve Bank of San Francisco makes a conclusion is apparently obvious to those of familiar with how the consumer debt relief world works, without a flood of available credit, consumers are not going to drive the economy forward.

“A key ingredient of an economic recovery is a pickup in household spending supported by increased consumer debt. As the current economic recovery has struggled to take hold, household debt levels have grown little. Some evidence indicates that households adjusted debt in line with house price movements in their local markets. However, the data show that consumer debt cutbacks were largest among households that defaulted on mortgages or had lower credit scores, suggesting that household borrowing also was restricted by tight aggregate credit supply.” – Source

In my debt relief industry forecast reports it is a fact I’ve been stating for a while now. Without growth in consumer credit the demand for debt relief services will remain flat but that it will take banks relaxing their underwriting to make that happen. While more sub-prime credit has been extended it certainly is nowhere at previous levels.

The Fed postulates another reason for decreased consumer spending is related to the slow home market. Without the need to fill new homes with stuff, people don’t need to go out and spend money on household stuff.

Because of the recent economic downturn it may just be that an entire generation of people may never again spend as they once did. But don’t worry, more people are being born everyday who will have no knowledge of the downturn and eagerly want to spend in the future. These things are always cyclical.

“Analysis of the data uncovers a number of interesting patterns in the evolution of household debt. For example, as this shows, borrowers who defaulted at some point in the sample period increased their nonmortgage debt loads during the housing boom at a much faster pace than did nondefaulting borrowers. To a large extent, this ramping up of nonmortgage debt levels occurred among younger borrowers and those with lower credit scores, that is, subprime borrowers. The reverse occurred once the housing boom ended. Mortgage borrowers who defaulted reduced their nonmortgage debt levels at a much faster pace than nondefaulters. This decline in debt most likely occurred because defaulters lost access to credit.”

Consumer debt fell substantially during the recent recession and recovery. The extent of deleveraging in consumer nonmortgage debt differs by households in different markets in a way that is consistent with the idea that highly indebted households seek to reduce debt loads when house prices fall substantially. However, the most important differences do not appear to depend on geography, that is, differences in past house price appreciation. Rather they appear to depend on the type of borrower. Within a county, borrowers who defaulted on mortgages tended to experience much larger reductions in nonmortgage debt than borrowers who stayed current on mortgages. Borrowers with low credit scores experienced larger reductions in nonmortgage debt than borrowers with high credit scores. These results suggest that tighter credit conditions also are probably restricting the flow of credit to consumers. Moreover, these changes in credit supply appear to be working at an aggregate rather than a regional level (see Williams 2012).

According to John Krainer at the Federal Reserve, “The early signs of recovery in the housing market are certainly welcome. But this analysis suggests that households are still facing credit supply headwinds.”

See also  Unsecured Consumer Debt Still Dropping


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Damon Day - Pro Debt Coach

Leave a Comment