America’s deleveraging and the revolt it sowed – Salt Lake Tribune

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Retrenchment came in two main varieties: by choice and by force. Some borrowers, seeing the devastation around them, scrounged up the cash to reduce debt.

Others went bust and saw their homes go into foreclosure, or lost access to credit as banks clamped down.

In both cases, living standards took a hit. Between 2000 and 2007, borrowed money was adding about $330 billion a year to Americans’ purchasing power, according to the Federal Reserve Bank of New York. By 2009, households were diverting $150 billion to pay back debt – a swing of almost half a trillion dollars, even without counting the impact of lost jobs.

Enter Donald Trump and Bernie Sanders.

Both presidential candidates have rattled the political establishment, in large part by appealing to blue-collar — and highly indebted — Americans with an “I understand your anger” type of message.

“Debt is a big part of the political story,” said Sherle Schwenninger, co-author of a study of household borrowing by New America, a policy institute in Washington. “The debt overhang, the debt struggles, the debt traps,” he said, all form part of the “narratives on both the Democratic and Republican side.”

Of course, when viewed from a different angle, the result of all this deleveraging is an American consumer in better financial shape.

Federal Reserve chief Janet Yellen highlighted this point two weeks ago, telling reporters in Washington that “household balance sheets are much improved.”

As a share of the country’s economic output, consumer debt is down almost 20 percentage points from its 2008 peak, at 78 percent. And because interest rates have stayed low, Americans can afford to keep current. Debt-service costs as a share of disposable income are near historic lows.

That macro picture doesn’t tell the whole story, though.

Debt — and the ability to repay it — aren’t distributed equally. Especially after the subprime lending boom, the lower-income groups have the heaviest debt burden, according to New America’s study. That’s one reason deleveraging is weighing so much on the recovery. It takes cash away from the people most likely to spend it.

There’s “a day-to-day, week-to-week struggle of ‘How am I going to pay this bill or that bill?”‘ Schwenninger said. And that fuels “a sense of desperation and anger.”

For many Americans, the end of the credit cycle was jarring. Lifestyles had been built around that extra cash, and people just hadn’t realized it could disappear, according to Diane Gray, a vice president at Navicore Solutions, a nonprofit financial counseling service in New Jersey. Those who sought help in the immediate aftermath of the crisis were “scared and distraught,” she said.

That desperation faded as the economy recovered, Gray said, and the profile of callers is now shifting: Housing debt is playing a smaller part, student loans a bigger one.







America’s deleveraging and the revolt it sowed – Salt Lake Tribune