Personal Balance Sheet repair
Private debt is often a bigger problem than government debt, in a mixed economy. Governments encourage private borrowing, and force some citizens to underwrite the losses of others. The great recession is essentially a tale of private debt gone wild.
Greenspan's folly: After the dot.com bust, Americans did not tighten their belts for long. Look at the first chart. After dropping slightly for two years (2003-04), debt payments rose as a percent of disposable income. This was Alan Greenspan's "clever plan" (TM) to get out of the recession: "borrow against your house".
A different (private) response: Then came the housing bust of the "great recession". Bernanke would have liked to repeat the Greenspan "solution", but this time, Americans were more scared. They have been repairing their balance sheets (see 2008 and beyond).
Flat levels of liability: Meanwhile, the total level (nominal) of household liabilities has flattened out (2nd chart) for the first time since the 1950's. On a log-scale (3rd chart), and compared to household net worth, one can see the flattening is less dramatic, but still real. This is not just about people borrowing less; large amounts of debt were written off: foreclosures, bankruptcy, etc.
Not enough: Households have not done enough. The Fed's response to the great recession has caused a financial asset boom that has introduced complacency. The rise in household net-worth (chart below) might even convince households to start borrowing again. Household ought to have cut back more drastically, but lets take what we can get.
Gross figures: One problem with the numbers above is that they are across the whole economy. The stock-market boom could implies that much of the increase in net-worth has been seen by the upper half of the population, with the lower half still in bad shape.
Going forward: A pause in borrowing usually precedes a turn toward confidence, and a credit-boom. That's a danger today: that people will forget the lessons of the recession and go back to splurging. Time will tell.
Greenspan's folly: After the dot.com bust, Americans did not tighten their belts for long. Look at the first chart. After dropping slightly for two years (2003-04), debt payments rose as a percent of disposable income. This was Alan Greenspan's "clever plan" (TM) to get out of the recession: "borrow against your house".
A different (private) response: Then came the housing bust of the "great recession". Bernanke would have liked to repeat the Greenspan "solution", but this time, Americans were more scared. They have been repairing their balance sheets (see 2008 and beyond).
Flat levels of liability: Meanwhile, the total level (nominal) of household liabilities has flattened out (2nd chart) for the first time since the 1950's. On a log-scale (3rd chart), and compared to household net worth, one can see the flattening is less dramatic, but still real. This is not just about people borrowing less; large amounts of debt were written off: foreclosures, bankruptcy, etc.
Not enough: Households have not done enough. The Fed's response to the great recession has caused a financial asset boom that has introduced complacency. The rise in household net-worth (chart below) might even convince households to start borrowing again. Household ought to have cut back more drastically, but lets take what we can get.
Gross figures: One problem with the numbers above is that they are across the whole economy. The stock-market boom could implies that much of the increase in net-worth has been seen by the upper half of the population, with the lower half still in bad shape.
Going forward: A pause in borrowing usually precedes a turn toward confidence, and a credit-boom. That's a danger today: that people will forget the lessons of the recession and go back to splurging. Time will tell.
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