Blizzard of debt forecast for consumers
In a "buy now, pay later" world, many Americans are spending in a way that experts deem unwise.
By Andrea Hopkins / Reuters / June 25, 2003
The hearty U.S. consumer has been hailed as the savior of the sputtering economy. But ever-lower interest rates are luring Americans to record debt levels, setting the stage for a repayment crisis later.
Mortgage rates are at record lows, car dealers offer zero percent financing for five years, and "buy now, pay later" advertisements appear at every turn.
Spurred by the cheap money, consumers are borrowing like never before. Household debt is rising about 10 percent a year; annual income growth rose just 3.7 percent in April.
The Fed could make borrowing even more attractive. Analysts expect the Federal Reserve to lower its key lending rate today to the lowest level since 1958."I compare this to giving a heroin addict a fix," said Paul Kasriel, chief economist at Northern Trust and a vocal Fed critic. "We keep encouraging this addict, this debt addict, to take another fix. And the economy grows... but in the long run, of course, it is not sustainable," Kasriel said. "When rates do start going up, it could be somewhat of a problem."
Already, consumer debt loads have helped produce a record 1.57 million personal bankruptcies in the 12 months to March 31. Mortgage defaults are also at a record high, while credit-card delinquencies are up sharply.
Sam Gerdano, executive director of the American Bankruptcy Institute, said policymakers are not worried about how lower interest rates will affect personal bankruptcies.
"But it is the other side of the coin of consumer spending. You need consumers to spend money; we need consumers to use credit to help drive the economy. But bankruptcy filings are a frequent byproduct of that relationship," Gerdano said.
Still, while low rates are helping fuel the borrowing boom, experts say a change in consumer attitudes has also sown the seed of debt. In America, consumers tend to spend before they save - and use of credit starts early.
"Younger people today, those from the middle and upper class, often have a car in their teens and frequently have a credit card before they are 20," said Stephen Brobeck, executive director of the Consumer Federation of America.
But consumers are not oblivious, he said. Recent surveys by the group found a quarter of Americans are "very worried" about their ability to repay debt, while another 25 percent can manage only as long as their current income holds steady.
Savings are also a smaller buffer than they used to be. Between 1952 and 1994, the savings rate averaged 8.7 percent, according to Kasriel. By April 2003, it was 3.7 percent.
The spending spree has been spurred in part by the housing upswing and a drop in 30-year mortgage rates to what mortgage company Freddie Mac said was a record low 5.21 percent. Mortgage refinancings have surged, and many homeowners are tapping into home equity to pay for home improvements, new cars or education, a phenomenon Fed Chairman Alan Greenspan has called "home equity extraction."
While the spending by consumers has been a vital engine of economic growth in the absence of a recovery in business investment, the pain may come later.
"We're concerned that a number of homeowners who are taking cash out of their homes will not be able to pay off their mortgages before their desired retirement date. And if they can't, they may not be able to retire," Brobeck said. |
