Walkaways help reduce consumer debt
The Federal Reserve is reporting that consumer debt has fallen at record rates. But not necessarily because we're all saving and skimping. Nancy Marshall Genzer explains.
Calculating debt (iStockPhoto)
TEXT OF STORY
KAI RYSSDAL:One of the difficult, but mostly positive lessons that Americans have learned from the credit crisis is that we ought to be saving more. The Federal Reserve keeps track of how much we collectively owe. And it says that last year, for the first time since 1945, household debt actually fell. So, we are all saving and skimping, right? Nah. Turns out we have less debt because we're walking away from it.
From Washington, Marketplace's Nancy Marshall Genzer explains.
Nancy Marshall Genzer: The Federal Reserve says the total debt of U.S. households shrank more than one and a half percent last year. But the debt wasn't paid off; the banks wrote it off as a loss, and the Fed recorded lower consumer debt levels.
Carey Leahy: People are, in some sense, walking away from their properties and, in some sense, reducing their debt loads through jingle mail.
Carey Leahy is an economist at Decision Economics.
Leahy: That means you leave the keys in the mailbox and then walk away from your property.
That's essentially what Christopher Betcher did. He declared bankruptcy almost two years ago. The financial crisis buffeted Betcher on a number of fronts. He appraises houses in northern Minnesota. His income went from a quarter million dollars in 2004 to $10,000 last year. Now, he has a second job. And, with no more debt, Betcher and his wife are starting to spend again.
Christopher Betcher: I mean, there's definitely some expenses we've done in the last six months that we would not have done, if it hadn't been for having that weight lifted off of us.
Betcher just bought his wife a $900 ring for their anniversary. But he's going to pay it off in six months, to avoid interest. He doesn't use credit cards anymore.
Brian Bethune is seeing that a lot. He's an economist at IHS Global Insight. Bethune says debt-free consumers are starting to spend. But they're not loading up the plastic.
Brian Bethune: It's mainly cash and debit cards that they're using. So that's OK. It still rings the cash registers, in so far as the retailers and restaurants and they'll take it.
But cash will only take the economy so far. You're not going to put a house on your debit card. Bethune says both banks and consumers will have to get comfortable with credit again for the economy to recover fully.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
Comments
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From MN, 03/15/2010
Let's see, he declares bankruptcy and walks away from his house. Then he buys a $900 ring for his wife. He was making $250k and now he's a broke loser living on cash. What a dope. Rainy day fund ring a bell? As for the ring -- well all I can say is that this is exactly the sort of spending that got you into your fix. Have a rainy day fund established yet? Nah, I didn't think so. But you have $$ for a ring for your wife. Yeesh. Whenever I have a good year, I save a lot of the upside. People like this guy will always be a wage slave because he has no self discipline. I just wish we all didn't have to indirectly pay for his lifestyle via bankrupcty.
From Atlanta, GA, 03/15/2010
There is a lesson in Mr. Bethune's life. When you are making $250,000 per year, don't spend $250,000 per year! The fable of the grasshopper and the ant comes to mind.
From Milan, MI, 03/14/2010
Paying for things in cash, using credit only for truly major purchases (like a house) or as a way to not have to carry cash, is fiscal sanity. The addiction to easy credit that seemed to fuel our economy for the last couple of decades was a *problem*, and we are now seeing the consequences. It's nice to hear that consumers are finally learning prudence; would that the government would start living within ITS means!
03/14/2010
the American Dream, originally, was multi generational. That is, the person dreaming the dream, would work hard to get his (usually) children to a middle class existance, and then his grandchildren would get to college, and thus live the American Dream. The original dreamer didn't live what he was dreaming.
But times have changed. Women are in the economy more, and income has dropped so that we now tell ourselves (incorrectly) that borrowing money to spend money is a great idea. Of course, we should know better--SAVING money in order to spend it, is the cheapest way to go. Low interest rates are not cheap--saving money with high interest rates, to increase the amount sooner, is the really cheap way to be a consumer society.
Changing the name of predetory loans to sub prime, hides little. These were loans made in bad faith and sometimes with faulty income information, but we are told jingle mail is a breach of a contract.
But, money always wants to be "in play". The stock market went down, collectables went down, raw materials went up, and so that left...real estate. And it left people who didn't know--or remember--the Savins and Loan debacle, ready to jump into real estate for no other reason than they were told, "Interest rates are low! You are a lumpen fool if you don't buy now while the principal cost is rising!"
huh?
From FL, 03/12/2010
Here again we have an example of Wall Street chicanery. Easy money funneled out of Wall Street caused an abnormal spike in real estate demand. We all heard stories of a neighbor who was buying houses then flipping them in 6 months for 20K more than they paid. But this bubble was fueled with easy cash that 'should have' been in the markets. If you recall, the dot com bust blew up the market and then the housing boom exploded. This was loose Wall Street cash looking for a place to go. Like Wall Street always does, they create a buzz around something (like GOLD is today), they start the buying to prime the pump, they get the little guys jumping into the pond for some action, then they sell out to all the little guys, pull out the rug, and take their profits. To those who think that a bunch of irresponsible home buyers took a misstep, take the blinders off your eyes. We've all been swindled by Wall Street MBA's dude! I think every one of us assumed that our exit strategy was to sell a house we could not afford if we got jammed up. How were we to predict such a precipitous drop in value which evaporated ANY reasonable exit from bad loan terms? Here again, Wall Street has what they wanted. They coerce you into a bad loan, then crash the market so you can't exit your terms. Even if you hang on for 5 years before going broke, they have made billions by selling your loan 5 times. America needs to wake up and smell the Wall Street game. It's all about the action, guys. And we, the public need to develop the brain pan to see through the smoke and mirrors!
GeneM
Florida
From New Haven, CT, 03/12/2010
Hi Kai-
Walking away from their debt.... with their credit rating absolutely destroyed for AT LEAST the next seven years. It is little wonder why they are buying stuff with either cash or (ugh) debit cards. I wonder how soon it will be before they can't even afford the proverbial rain barrel???
Indeed the so called "American Dream" has finally become what I have always believed it was: a nightmare. It is too bad that the governments outlawed debtors prisons.
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