The Federal Reserve Bank of New York today released its Quarterly Report on Household Debt and Credit for the third quarter of 2010, which shows that consumer debt continues its downward trend of the previous seven quarters, though the pace of decline has slowed recently. Since its peak in the third quarter of 2008, nearly $1 trillion has been shaved from outstanding consumer debts.This is not only the result of the shift in people's behaviours, but also an unintended consequence of low interest rates and of the misuse and abuse of option-ARMs and other non-fixed mortgages: when your saving account pays 0% in interest, but that your mortgage costs you 4% or your credit card costs you 18%, you end up just repaying your debt.
Additionally, this quarter’s supplemental report addresses for the first time the question of how this decline has been achieved and notes a sharp reversal in household cash flow from debt, indicating a decrease in available funds for consumption. According to newly available data through year end 2009, the payoff of debt by consumers reduced their cash flow by about $150 billion, whereas between 2000 and 2007, borrowing had contributed more than $300 billion annually to consumers’ cash flow.
This unintended consequence, and unseen by such bright people as Ben Bernanke and his friends at the Fed is going to be one of the main reasons why he's bound to fail. People want to save, badly need to save, and they are actually not even impacted by the low interest rates, as reimbursing a 4% interest mortgage is like saving at 4% on a savings account.
Those people who are really losing in the current environment are those who use the income from fixed income securities and saving accounts to earn their living: mostly older people. But in any case, people with no debt to reimburse are the exception and not the majority, so the general shift and trend is in motion, and I don't see how it could be stopped.
Excluding the effects of defaults and charge-offs, available data show that non-mortgage debt fell for the first time since at least 2000. Also, net mortgage debt paydowns, which began in 2008, reached nearly $140 billion by year end 2009. These unique findings suggest that consumers have been actively reducing their debts, and not just by defaulting.
“Consumer debt is declining but only part of the reduction is attributable to defaults and charge-offs,” said Donghoon Lee, senior economist in the Research and Statistics Group at the New York Fed. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”
Also noteworthy in the third quarter:
- Household delinquent debt continues to decline and currently account for about $1.3 trillion or 11 percent of consumer debt, representing an 8.2 percent decline from a year earlier;
- The proportion of current mortgage balances that transitioned into delinquency rose slightly from 2.6 percent to 2.7 percent, after about a year of decline.
- Given the similar pattern observed in the third quarter of 2009, one might suggest this is a seasonal effect, though the New York Fed continues to closely monitor such developments.
- About 457,000 individuals received home foreclosure notices on their credit reports between July 1 and September 30, 2010, a 5.5 percent decrease from the second quarter and a 6.4 percent drop from a year earlier.
- The number of new bankruptcies noted on credit reports fell 16 percent from the previous quarter (from 621,000 to 522,000), but is 1 percent higher from a year earlier.