The enormous household debt burden wasn't always a part of American life. Changes starting in the 1970s seeded the later explosion.
Household debt hit a record $12.73 trillion in the first quarter, higher than the previous peak of $12.68 trillion in 2008 — on the brink of the Great Recession.
Nobody’s calling a debt-driven downturn this time. Fewer households are behind on payments and bankruptcy filings hit an 18-year low.
If this sounds like a big number, it is. United States gross domestic product totaled $19 trillion in April. Some caution is in order: The numbers aren’t adjusted for population growth or for inflation. But if anyone expected a fundamental shift in overall American debt addiction after 2008 — similar to the ways the Great Depression affected those generations — it hasn’t happened. Mortgage borrowing is down — they’re harder to get now — but student loans and auto loans are up.
Lack of rigorous comparable data make historical comparisons inexact, but Americans weren’t always such lusty borrowers. For example, the Federal Reserve’s measure of “total consumer credit, owned and securitized” — which excludes real estate — stood at a measly $6 billion in 1943. In March, it was $3.8 trillion.
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Borrowing grew modestly from the 1950s through the mid-1970s, when something changed. Household debt began rising, hitting more than $4 trillion in 2000. After 2000, the binge exploded, especially driven by mortgages (Liberty Street Economics of the New York Fed has an interesting chart and commentary on the composition of the debt).
What changed? In 1958, a skeptical Bank of America tested a credit card, the BankAmericard, in Fresno, Calif. The bankers were dubious because the economy ran on cash, checks and in-store credit. Would anyone use a card? Also, many Americans, especially after the Depression, considered debt dangerous if not immoral. But the BankAmericard was a hit, went statewide and eventually became Visa. About the same time American Express got into the credit-card business, launching the first plastic one in 1959 (the much more exclusive Diner’s Club began in 1950). Department stores joined in and the credit-card era was born.
Postwar Eisenhower prosperity and a rising middle class were also at work. Still, these initiatives, like auto loans, were typically overseen by dour bankers and standards for getting credit were strict. The FHA and VA loans that spread homeownership (at least for whites) had low payments and interest rates. Household debt was barely a story in those days, except for how low it was.
Two things starting in the 1970s and accelerating after 1980 changed the equation. First, wages began stagnating (while inflation rose). This often forced a family that had been able to prosper with one breadwinner to need both adults working to get by. Second, a new generation of bankers and financiers saw consumer and mortgage debt as a major profit center, especially as deregulation took hold (they were not chastened or enlightened by the savings and loan debacle of the late 1980s).
As a result, institutions began offering credit to more people, with much lower lending standards. For example, marketing credit cards to college students became a big push. Americans, drunk on consumer culture and wanting the latest products, began to take on debt of all kinds. Add in student-loan debt as state legislatures cut funding to higher education and the federal government expanded loans to include the for-profit “university” racket. Deregulation further enticed the subprime mortgage racket and, worse, the securitization of toxic mortgages to be sold on Wall Street for high profits. Until the roof fell in and taxpayers bailed out the “financial services sector.” So here we are.
This is a moment to thank whatever higher power or random universe you wish that Americans enjoy the world’s reserve currency. It allows us an international gold card with an unlimited balance. It is among the safety nets that lets so many of us to carry big credit balances and enjoy the products of the world. The reckless regime in Washington, D.C., is endangering that as it abandons sober American leadership, including in the liberal economic order and trade. The world is changing fast and that gold card isn’t guaranteed.
Today’s Econ Haiku:
Monopolies are wired up
You’re without a net