The Iceberg's Tip: US Families Reduce Household Debt to Pre-Financial Crisis Levels

This is good news, make no mistake. But it is also a symptom of a broader and still extant malaise.

American families have continued to reduce their debt levels, at this latest report, to levels below those that preceded the 2007 financial crisis. the problem is that this is borne of necessity, not a newfound commitment to prudent management of household finances.

The reality is that households have still not rebuilt the wealth lost during the crisis and the subsequent recession it triggered and which still lingers. Many are still out of work and too many of those now working are doing so at levels lower than those achieved in the previous jobs. Consumers without the ability to consume constrain the entire economy, making it likely that the de-leveraging process will continue to depress the larger economy.

There is no point in asking what policy makers should do because their positions are dictated by political ideology rather than pragmatic assessment of what might make the most sense for reviving economic growth. This means that each new data point is refracted through the prism of short term political expediency rather than through the mutual advantage to be gained from a more financially secure polity.

Households will hopefully to act prudently, even if their elected representative choose not to do so. The path to eventual recovery leads that way. But as the iceberg analogy suggests, it may take a while to reduce the inherent threat. JL

Jim Puzzanghera reports in the Los Angeles Times:

American families reduced their debt load in the first three months of the year by 1%, bringing it down to pre-recession levels after an uptick in the last quarter of 2012, the Federal Reserve said Tuesday.
Outstanding household debt, including mortgages, credit cards and auto and student loans, dropped to $11.23 trillion in the first quarter of the year.
That was down $110 billion from the final three months of 2012 and well below the peak of $12.68 trillion reached in the fall of 2008, the Fed said.
Families have been steadily scaling back their debt since the collapse of the subprime housing market and the onset of the Great Recession.

The trend reversed at the end of last year, when household debt increased by $31 billion in the fourth quarter.

But Fed officials noted the downward trend has resumed this year.

"After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, the New York Fed's senior vice president and economist.

Housing was a big driver in the improved balance sheets of U.S. households. Total mortgage debt dropped to $7.93 trillion from $8.03 trillion in the previous quarter.

Mortgage delinquency rates fell to 5.4% from 5.6%. And the number of people who had new foreclosure notations added to their credit reports was down 12.5% to 184,000, the fourth straight quarterly decline.

Households did a better job of paying bills across the board in the January-through-March period. The credit card delinquency rate dropped to 10.2% from 10.6% and the student loan delinquency rate fell to 11.2% from 11.7%.

The overall rate of household payments that were at least 90 days late fell to 6% from 6.3% the previous quarter. At its peak three years ago, that rate was 8.7%.

Aside from housing-related loans, family debt was roughly flat, the Fed said. A $29-billion drop in credit card and other consumer loan balances was offset by an $11-billion increase in auto loan levels and a $20-billion rise in student loan debt.