Can unpaid consumer debt speed recovery? Don't bank on it
You might think making the case that unpaid consumer debt can speed the recovery is absurd, but The Wall Street Journal actually is doing just that in Monday's paper. The argument keys off Federal Reserve figures that put total household debt, including mortgage debt, at about $13.7 trillion, or 125 percent of annual after-tax income. The Journal's reasoning goes like this: As people deleverage, even if it's through bankruptcy and foreclosure, they'll move more quickly back to a more sustainable debt level of 100 percent. At that point, consumers would then be able to help with the recovery because they'd be in a position to spend again.While I can understand the Journal's numbers, its story doesn't fully examine the actual impact on consumers (though it does say there's no guarantee spending will take off under this scenario).
The problem is that even though defaults on consumer borrowing would hasten the return to more normal debt levels, the impact that foreclosures and bankruptcies would have on a consumer's credit record certainly wouldn't bolster the ability to consume yet again. Credit terms are so much stricter now than they've been in the past 10 years that even consumers with good credit scores -- between 680 and 739 -- are reporting that they've been denied credit on numerous posts or in comments to AOL's WalletPop. I've asked banks about their underwriting terms numerous times, but their only response is that each application is handled on a case-by-case basis.
In the current economic climate, you can forget about getting a mortgage or possibly even a credit card with a rate of less than 29.9 percent, if you have a foreclosure or bankruptcy in your credit history. Many banks want to see a credit score of 740 or higher, whether you're seeking a credit card or a mortgage. For example, I have a friend who filed for bankruptcy at the beginning of 2003 and has had a perfect payment history since then with a credit score over 720, but he's still being denied credit. The reason banks give him is his previous bankruptcy.
As Mark Zandi, chief economist for Moody's Economy wrote in a recent column: "The resulting loss of household wealth is enormous and weighs heavily on consumers' willingness and ability to spend. Since the peak in housing wealth, homeowners have lost more than $5 trillion in home equity, and close to 15 million homeowners -- more than a fourth of all those with first mortgages -- are estimated to be under water; their homes are worth less than they owe. With nest eggs so cracked, households are in no mood to spend more."
While the cleansing of bad debt off the banks' books may help speed them back to health, I doubt that the same thing would happen with consumers. And the Journal points out that rising tax burdens as the government pays down the soaring national debt won't help consumer spending. We're clearly digging the economy deeper into a hole that consumer spending won't be able to fix.
That's a serious problem since such spending makes up two-thirds of the U.S. economy and about one-fifth of the global economy. Without consumers taking the lead, who will?
Lita Epstein has written 25 books including The Complete Idiot's Guide to Improving Your Credit Score.
Why is Oprah going to cable? Hint: It's nothing to get teary about
Kisses from Hershey: Candymaker may court Cadbury with $17 billion bid
D-Day for Harry Reid: Can he wrangle 60 votes for Senate health reform bill?
Reader Comments (Page 1 of 1)
10-26-2009 @ 2:21PM
nick said...
Only if Rahm and Axelrod get their baseball bats out and start working over the folks.
Reply
10-26-2009 @ 2:35PM
John said...
Thank Harry Reid and Nancy Pelosi because you now have a 1.4 trillion defecit.
They spent everything including the borrowed money from China.
Reply
10-26-2009 @ 3:30PM
pat said...
People are pretty sick and tired of the corporations and banks making truck loads of money and sticking it in their pockets. Its all been done on the backs of common people. There will be more protestors about not helping the banks screws us anymore. They need to be regulated with lots of prison time and chains.
Reply
10-26-2009 @ 4:40PM
Gayle Adcock said...
The banks didn't earn the money they stuck in their pockets. That was bailout money that did not trickle down. I just reread my service agreement with my bank. It's not about service at all. It's basically giving themselves license to steal. Apparently that's legal as long as they tell you first. Where is the regulation. I want alot of it and fast.
10-26-2009 @ 4:10PM
MyKisa said...
...it is good for corporations to make money...I am an LLC and if I did not make money, I would not eat....fed reserve "creates" money, charges you interest, and allows congress to write tax law, to take even more back from ya...the problem is not corporations as much as it is the parasitic fed and your pig-at-the -trough congressman
Reply
11-03-2009 @ 12:16PM
JoeB said...
It’s not just the Democrats here we have spent and spent all those years. If one looks at the record we have said the budget was balanced (money coming in compared to going out) when in fact we owed billions and billions in debt from when it was not balanced. It is our fault cause we voted for the people in to begin with since the 1950’s no matter if it was a demarcate or a republican administration, or a demarcate or a republican congress we have run up our own national charge card over and over again with no hint of paying it back because if they did they have to raise taxes and cut spending. Which would mean people would be pissed off. Here is the short of it folks the free ride is over and it is time to pay the piper.
Reply
10-26-2009 @ 4:04PM
Jim said...
If the banks and credit card co. are only going to lend to people with a credit score of 740 they will be out of bussiness within 18 months JMc
Reply
10-26-2009 @ 4:32PM
Gary said...
Lita, your story once again is slanted toward the negative side. Every time one of you idiots guesses on how things will go, you get it wrong, EVERY TIME. Now here we go again. I've been saying all along that increased savings will result in a pent up push to buy something, probably at Christmas. And while the numbers won't be as high as normal, they are going to surprise you. This with more companies announcing they are starting to hire some of their workers back. Get on the bus, or get run over, Lita.
Reply
10-26-2009 @ 4:50PM
Alan Lacey said...
The gap between Wall Street and Main Street is ever widening!! A jobless recovery is NO recovery! And please donot tell me that a strong Wall Street is a precurser to a strong economy. (Think Shadow Recovery)
The Obama administration and all of the debt that is being racked up is stopping any REAL recovery.
People are paying down debt to get rid of it. NOT start all over again. I have recently paid off 3 cc's and I am not going back!!
The fly over states are just about done with this administration!!
Reply
10-26-2009 @ 5:46PM
Mike Lamothe said...
I agree that the Banks have tightened lending. Banks are not reducing credit card rates for even the best customers.
This could be a blessing in disguise and force us to reduce useless consumption and reduce debt. It will take a lot of personal discipline to balance our pesonal spending with our income. We can no longer spend like we did in the past. Delayed gratification will once again become a virtue just as it was for our parents, who lived through the Depression and WWII.
Reply
10-26-2009 @ 5:09PM
W. C. Peterson said...
The Wall Street Journal used to be a credible newspaper until Rupert Murdoch bought it. Now, it's about as knee-jerk as Faux Noise. I wouldn't believe the WSJ even if they printed that the sun rose in the east every morning. I'd have to go look and see for myself. Mr. Murdoch does not see the world as it really is and his media empire is true to their owner.
Reply
10-26-2009 @ 6:02PM
Wanda said...
Wall street Bailouts, bonuses with TARP money etc.....WHEN oh WHEN is the Government going to do something for the unfortunate UNEMPLOYED people (at no fault of their own) who are loosing their homes???? Washington do the right thing and help the Unemployed!! Why should they loose their homes because they lost their jobs? Take the TARP money that some of the banks paid back and help the Unemployed!!!! Everyone who is Unemployed and are going to face loosing what you worked so hard for, CALL, EMAIL, MAIL your REPRESENTITIVES and ask them what they are going to do about this!!! Only we can make a difference and let our voices be heard! They heard Wall streets cry for help, Now its our turn!!!!!!!!!!!!!!!
Reply
10-26-2009 @ 6:43PM
L R said...
Most consumers are concerned about what is going to happen. The *Mass Media*has tried to encourage people to spend and help the economy return to normal. In the last 6 months I have articles that suggest we need to *Help* support economic growth. If we had taken their suggestion some of us would be living under a bridge somewhere. Un employment jumped 2 clicks over the past 3 months. We have another wave of foreclosures on the way the *Mega Mansions* and commercial real-estate loans. But you go first* if things go well I*ll be right behind you.
Reply
10-27-2009 @ 5:57PM
Michael Lach said...
BestCreditRepairLetters.com is a site ran by volunteer credit repair experts that offers credit dispute letters for credit inquires, late comments, collections, charge-offs, etc for only $89.99
Reply