Debt load looms as danger for many families!greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Debt load looms as danger for many families!
By Kathy Bergen
Tribune Staff Writer
February 24, 2000
Rolling with the economic good times, upbeat consumers are assuming unprecedented levels of installment debtand handling it fairly well.
Just beneath this smooth surface, however, are nagging concerns that Americans may be saddling themselves with debt loads that will feel a lot less comfortable should the economy slow significantly or the stock market turn downward for a sustained period.
"If you're asking, 'What is the affect of powerfully increasing consumer debt loads?'" said Elizabeth Warren, a professor at Harvard Law School, "the answer is, 'It's taking the flexibility out of American family finances.'
"By taking on debt, families have taken away their cushion," said Warren, who specializes in bankruptcy law.
On the whole, the picture is positive: Fewer Americans are making late payments on loans, defaulting on loans or filing for bankruptcy. Unemployment is very low. Household assets are rising.
But there are pockets of vulnerability. Not all Americans own high-flying stocks. Not everyone is benefiting from rising incomes. New jobs don't necessarily pay as well as old ones. And the unexpected happens.
As well, economists say, U.S. households are basing their borrowing and savings decisions on a set of optimistic assumptions about the job market, personal income growth and stock market performance. And danger lurks if those assumptions prove to be wrong.
"You would see personal bankruptcies start to rise again, and you would probably see delinquency rates on consumer loans, mortgage loans and credit card borrowing start to rise again," said Tim O'Neill, chief economist for Harris Bank/Bank of Montreal. "I don't think there is any question there would be an adverse shift in the financial health of the household sector."
This is not to say that O'Neill and other economists foresee a household credit crisis. They don'tin part because many Americans are pretty flush right now.
"The state of household finances depends not only on current debt levels, but also on asset levels, and asset levels have been getting fed very nicely, especially by the equity market performance over the last several years," O'Neill said.
Still, debt levels are high.
Consumers bought on credit in a big way over the holiday season, contributing to a 7.6 increase in outstanding consumer credit in 1999, to a record $1.4 trillion, according to preliminary figures from the Federal Reserve Board. This was the greatest annual percentage increase since 1996.
Taking consumer credit and mortgage credit together, estimated debt payments amounted to 13.4 percent of disposable personal income in the third quarter of 1999, the highest level in nearly 10 years. But 60 percent of U.S. households have no mortgage debt, so many Americans have far larger debt burdens than this nationwide estimate would suggest.
Meanwhile, a smaller slice of the populationthose who actively trade stocksare making increased use of borrowed money, or margin loans, to make their purchases.
Brokerage firms that are members of the New York Stock Exchange, for example, reported debit balances in margin accounts of $243.5 billion in January, up 59 percent from a year earlier.
Indeed, the surge in margin debt has raised eyebrows among federal regulators, who are now studying the issue.
While Americans have racked up higher levels of debts of various sorts, they have reduced the amount of money they are saving. The personal savings ratesavings as a percentage of after-tax incomedropped to a record low of 2.4 percent last year.
Still, economists are not wringing their hands, at least not yet.
For starters, the savings rate doesn't reflect gains in household assets due to stock price appreciation or increased home values.
And secondly, several measures seem to indicate Americans are handling their debts fairly well.
Delinquency rates on various sorts of loans are not terribly high, from a historical perspective, according to Fed data. .
And the level of loan losses that banks are writing off is well below levels experienced as the nation emerged from recession in the second half of 1991. Meanwhile, bankruptcy filings have dropped for the first time since 1994, according to the Administrative Office of the U.S. Courts. Personal filings declined by 5.3 percent in the fiscal year ended Sept. 30, 1999, to 1.3 million, coming off a high the previous fiscal year of 1.4 million filings.
Some observers say filings may have surged in fiscal 1998 because debtors were attempting to file ahead of federal legislation that would have made it more difficult for them to fully discharge their debts. As it turns out, bankruptcy law was not overhauled that year, but similar legislation is pending again in Congress.
In any case, a number of observers say the decline in filings in fiscal 1999 reflects more than just a retreat from unusual circumstances in 1998.
"The data suggest to me that people are becoming more knowledgeable consumers of credit," said Karen Gross, a New York Law School professor specializing in bankruptcy law and consumer finance.
"This doesn't mean filings are low or that there's no trouble, but we are not in a crisis," she said.
Rather, a number of observers say debt-laden consumers could find themselves in tight positions if the job market, the economy as a whole or the stock market take turns for the worse.
If, for example, the Fed continues to raise interest rates, it could lead to a modest recession and stock market correction, O'Neill said.
Rising interest rates not only would raise the cost of borrowing in the future, but also would boost costs for the increasing numbers of consumers with adjustable-rate loans, noted Susan Sterne, president of Economic Analysis Inc. in Greenwich, Conn.
Some observers see dangers in the current levels of debt, even under the rosy economic conditions that exist now. Even though unemployment is at 30-year low, at 4 percent, there is a fair amount of job churning taking place, noted Warren, of Harvard Law School.
"So you have people moving down the job ladder as well as up," she said.
"If you're not deeply burdened by consumer debt, you can survive it," she said. But if you have big debts, it's a much tougher situation.
Lindy and Donald Vandersteeg of Elk Grove Village found that out firsthand when Donald fell at his factory job, injured his knee and was out of work for two years.
"We had had two paychecks and were doing fine," said Lindy Vandersteeg, 49, a network administrator for a downtown law firm. "Our credit was up to date and we bought a new car.
"Then for two years, it was only my paycheck, and that's what spiraled us into a problem," she said.
With $18,000 in debt and bill collectors breathing down their necks a year ago, they went to Consumer Credit Counseling Service of Greater Chicago, a non-profit organization that helps clients set up realistic programs to pay off their debts.
Donald Vandersteeg, 38, retrained as a chef and is working for a food-service firm, and the couple has managed to pay off half their debt load.
Feeling like they are nearly out of the woods, Lindy Vandersteeg said she will avoid using credit cards in the future.
"Don't get a lot of credit cards because you cannot foresee the future," she said in a bit of advice to other consumers. "You get complacent, you get comfortable, you get cocky, and the next thing you know, look what happened.
"It took us three years for him to get established again. That's a long time."
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