The Big Deleveraging Continues

Can we talk about debt?

U.S. consumers have way too much of it. It's likely the single biggest reason the economy is so slow. Ten years ago, the economy was powered by people taking out a second mortgage to buy more stuff, which increased employment for people who made and sold the stuff, who rang up their credit cards to buy stuff themselves, and so on. Today all of those people are trying to figure out how to repay that debt, which brings everything to a halt.

The good news: Households have been shedding debt for several years. And that so-called deleveraging is continuing at a good clip.

The Federal Reserve released this chart a few days ago showing exactly how much debt has been chipped away:

Household debt has declined by $1.3 trillion since the peak in 2008. That's made up of a $300 billion rise in student loans, and a $1.6 trillion fall in all other forms of debt (mostly mortgages).

There are better ways to look at this that make the decline look even more impressive. What matters when measuring debt isn't the raw amount, but the amount of debt in the context of income. Take the same chart above and divide it by disposable incomes, and you'll see that the debt-to-income ratio has declined about 18% since the previous peak. It's now at the lowest level in a decade:

Source: Federal Reserve.

And with interest rates at all-time lows, the monthly payments required to service all the debt households own has dropped, too. Look at debt-service payments as a percentage of disposable income, and you get this:

Source: Federal Reserve.

The lowest level since 1994. With the majority of household debt being in the form of mortgages, and 30-year mortgage rates at an epically low 3.6%, the relief for the millions of Americans who have refinanced (truth be told, millions more can't) has been drastic. And since a good bulk of those refinancings are in long-term fixed-rate mortgages, this is permanent relief.

Whenever the topic of deleveraging is brought up, someone inevitably points out that a lot of the decline is due to people defaulting on debt rather than paying it off. My response is always, "So what?" They're getting rid of the debt, and it's the bank's problem to figure out how to deal with the loss. But there's more going on here than just defaults. A separate Federal Reserve report shows the amount of consumer debt outstanding fell from 2008 to 2010 even after defaults are stripped out -- an outcome caused by people actually paying their debt down. And while the figure is now back in positive territory, the amount of new debt being accumulated per quarter, net of defaults, is about half the amount it averaged last decade.

The most important question is how much more deleveraging needs to take place, and how long it will take. A McKinsey report from January estimated that households could be done deleveraging by the middle of next year. That could be optimistic. Some simple calculations show the economy as a whole could be deleveraging for another decade. The truth is, we don't know when it will end. The amount of debt households can maintain is largely built on how confident they are about the future. That can't be predicted or modeled. Unemployment also plays a big role -- another trend that can't be predicted with confidence. But here's the good news: We're definitely moving in the right direction.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 31, 2012, at 12:39 PM, Darwood11 wrote:

    "Household debt has declined by $1.3 trillion since the peak in 2008."

    That it true. However, Federal debt over that period has increased by something like $4 trillion.

    I suppose a cynic could say the the taxpayer is offloading debt and due to government policy, is effectively passing it to the future.

    So has "kick the can down the road" reached a new high, become pervasive throughout our society, and has even the "woman in the street" figured out how to game the system?

  • Report this Comment On August 31, 2012, at 12:47 PM, TMFHousel wrote:

    ^ Total debt, including household, corporate, federal, state, local, everything, as a percentage of GDP has been falling since 2008.

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&am...

  • Report this Comment On August 31, 2012, at 1:44 PM, atkinskd wrote:

    And if households are smart they'll learn to invest and save to grow their disposable income rather than piss it away in interest - I have:)

  • Report this Comment On August 31, 2012, at 1:53 PM, astuber9 wrote:

    Good job beating this dead horse. It is a huge story that needs to be talked about but it seems nobody cares or understands it. I think the politicians that think lower taxes will stimulate the economy to the level they desire do not understand how powerful this deleveraging process is.

  • Report this Comment On August 31, 2012, at 1:56 PM, Darwood11 wrote:

    Here's a chart of "total public debt" which indicates that there might in fact, be some form of "debt transference" underway:

    http://research.stlouisfed.org/fred2/graph/?s[1][id]=GFDEBTN

  • Report this Comment On August 31, 2012, at 4:33 PM, tkell31 wrote:

    I'm confused how people defaulting on their mortgage is somehow good for economy? If those people couldnt pay their mortgage what are the odds they freed up any money to buy other things while at the same time paying about the same in rent?

    Bottom line our economy is made up of way too many low paying jobs for the majority of people to buy a house and participate in discretionary spending. Welcome to the new normal.

  • Report this Comment On August 31, 2012, at 4:33 PM, feldie47 wrote:

    Keep your eye on the student debt portion. That can't decrease and never be forgiven thanks to the 4 year old bankruptcy law. Mortgage debt will decrease as homes are lost, but young people are becoming indentured servants, and that's really really dangerous.

  • Report this Comment On August 31, 2012, at 5:00 PM, ManagingIt wrote:

    Most of the economy is driven by the consumer puchases and until those consumers become comfortable with their debt and become more confident in their future the economy will be stuck in the doldrums. I am thrilled to see that the average person is paying down their debt and I hope it is a sign that they are learning to manage their debt wisely

  • Report this Comment On August 31, 2012, at 5:28 PM, TMFHousel wrote:

    <<I'm confused how people defaulting on their mortgage is somehow good for economy? >>

    It's good in the same way chemotherapy is good: Painful and with lots of side effects, but totally necessary to save the patient's life.

    <<If those people couldnt pay their mortgage what are the odds they freed up any money to buy other things while at the same time paying about the same in rent?>>

    They can't pay the same amount in rent. The point is they were living a life they couldn't afford before, and now they're being forced back into reality.

  • Report this Comment On August 31, 2012, at 5:58 PM, chris2670 wrote:

    So what? Deregulation of certain aspects of the financial systems have ruined this economy. All in the name of capitalism. All in the name of greed. The banks were completely part of that process. They didnt want to work with people on mortgage modifications not because you didnt meet the criteria, because they would end up with the house because you couldnt afford to be there anymore. Is it the people's fault? Partly. Is it the banks fault? partly. People have more money now because they need the liquidity of cash since they've wiped away their debt due to filing bankruptcy before foreclosing on their house. When your credit is ruined for 7-10 years, you HAVE to keep cash on hand and you DONT have the ability to pay for things on credit anymore. ARE YOU KIDDING ME??? It isnt because they've paid it down!!! Perhaps there is a % of the population that have. You're right, the basic problem is that people wanted things in excess and now that ship has sunk like the Titanic. The economy isnt growing because people need the money they actually have just to live on the basic things they need. In addition, our country has not fostered, advocated or supported a position of keeping jobs in this country and allowed our financial powers to run the country. If FDR had been fortunate to live to see the day to enact the 2nd Bill of Rights, perhaps this country would not be in the predicament that we're in today. I'm sorry but this article is pretty idiotic.

  • Report this Comment On August 31, 2012, at 7:19 PM, 123spot wrote:

    Excellent article. Thank you. Spot

  • Report this Comment On August 31, 2012, at 9:04 PM, pauldelang wrote:

    Good Article but I have a few questions and comments.

    My first question is what is an acceptable level of debt? By that I mean do we run our households into debt up to a certain point and then just maintain that debt level for the rest of our lives - even into retirement? If we go over the level do we then decrease or if we go lower do we then increase the debt level again or should we try to run as little debt as possible and only make debt when we have to, and then only for a short a period as possible.

    To me this article sound as if running high debt levels is a necessity and has become the norm. If running a lot of debt has become the norm for individuals and governments have we reached the age of perpetual debt? Or - only until some disaster or crises forces us to become debt sober.

    My second comment is related to your comment about someone defaulting being the banks' problem how they deal with their losses. We know how the banks deal with those losses. They run to the government for a bail out who then add the bail out money to your future taxes. Those losses remain your problem, directly or indirectly, individually or collectively. Defaulting is the shortsighted view and solves nothing. The can just becomes a bucket being kicked down the road.

    My third comment is related interest rates. We all know that the Fed is keeping interest rates artificially low and plans on keeping doing so for the foreseeable future. Very low interest rates is designed to allow breathing space, not to create a false sense of low debt levels. In any event the banks just solve the low income from mortgages problem by increasing their service fees until the combined income from mortgages and service fees give them the desired profits. Either way you pay.

    To my mind the article implies that due to "falling" debt levels people should get ready to start making debt again. Any one who abuses artificially cheap money is going to get the shock of his life when interest rates rises again. Couple that with the fact that the Fed is taking up almost all the bonds issued by the Treasury you have the absurd situation that one branch of government is borrowing money to another branch of government to finance the government's deficit.

    It is not even a question of Peter paying Paul to pay Peter anymore, it is Paul borrowing to Paul so that Paul can pay Paul.

    This situation can only lead to complete financial disaster and it may be sooner than we think.

  • Report this Comment On August 31, 2012, at 9:48 PM, TC118 wrote:

    Looking at the overall chart seems to indicate that only mortgage debt is down. Since there are both high foreclosure rates and low refinancing rates, it doesn't seem that any progress or change in overall attitude toward paying down debt is happening. Not sure that I see any positive trend here.

    Renting is like off-balance sheet financing. A company incurs a long-term liability that doesn't show up on the balance sheet. The financing is baked into monthly payments at higher rates that don't show up in the capital budget. It looks like there is no debt, but in fact the company is paying more for the same property. Technically there is lower debt, but in reality there is debt here for the former homeowner. He now has to pay for the rest of his life instead of for 30 years; he just has more flexibility about whom he pays and where he pays. In the short run he may be able to rent now cheaper than buy, but when long-term equilibrium returns, he will be paying more for the comparable amount of space.

  • Report this Comment On August 31, 2012, at 10:56 PM, maiday2000 wrote:

    GDP in the US has increased by $1.7 Trillion since January 1, 2009, household net worth at best is even, while public debt has increased by about $5 trillion.

    We've essentially borrowed money for negative wealth creation. I can hardly see how that is positive.

  • Report this Comment On September 01, 2012, at 12:17 AM, scitracker wrote:

    Students should be permitted to refinance their student loans to a much lower rate comparable to a prevailing bond rate commensurate with the time frame for their payoff. That they should be stuck with interest rates, sometimes exceeding 8%, in today's market is a real crime, Freeing up even a little of graduates' income could have a big impact on the economy. After all, these are the young people starting their lives, starting families and needing both jobs and disposable income. They will buy things with this income. Richer, or more elderly, people will merely add to their savings. We've had 10 plus years of reduced taxes, with the end result being trillions of dollars sitting on the sidelines waiting for opportunity. Well, we need customers and a market to invest in. Too bad we've saddled our future customers with trillions in debt so that they cannot be the market we need.

  • Report this Comment On September 01, 2012, at 12:38 AM, PositiveMojo wrote:

    This is likely to fall on deaf ears, but the government made it easy for people to get mortgage loans causing a bubble which burst in 2008. Now we have a new bubble, the student loan bubble.

    The government has made it possible for students to take on massive debt that far outweighs their future earnings. This has not only burdened the student, but just like housing, has caused the price of education to rapidly increase. The current college generation is being crushed under this debt.

    I cannot predict how the student loan bubble is going to burst, but burst it will. Thanks to all those in government whose good intentions have a significant down side.

  • Report this Comment On September 01, 2012, at 12:47 AM, mooonguy wrote:

    Here is how the graph looks to me. Mortgages are going down. Student loans are going up. Everything else is fairly constant.

    With less movement in the housing market and cheap interest and aging baby boomers, decreasing mortgage debt is just a fact of circumstance and doesn't indicate anything about consumers positioning themselves.

    And the kids are getting screwed.

    The positive outlook in this article was pretty delusional.

  • Report this Comment On September 01, 2012, at 2:41 AM, jzdancefor wrote:

    Not all the people who did shortsale lost money.

    One of my friends, she bought the house which increase price in two years from $310,000 to $540,000. She took a new loan cash out money. two years later she did short sale. She acturelly got about $200,000 out from it.

  • Report this Comment On September 01, 2012, at 7:08 AM, troutfishin wrote:

    "Deficits don't matter." - Dick Cheney

    I think that pretty much sums up the American way of thinking. However, there are many other countries that do not see it this way and quite a few own American debt. The question then becomes, "What do we tell our creditors when they come to collect?" Not to mention, that our pride and joy social safety nets also own a substanial portion of our nation's debt. What do we tell the millions of Americans, 18-54, when it comes time for them to collect from the pension fund and medical fund? You know, the ones that Americans are required by law to pay into such that they expect to receive a payment from when they have reached "retirement" age. The Republicans think they have a plan as well as the Democrats. The reality of the situation is that in our debt-based capitalist economy, the debtor never becomes debt free and its in the best interests of the creditor to keep it that way. And the Congress, well considering more than 50% of them are millionaires, when they deficit spend and get good ol' Ben at the Fed to back them up with notes, I'm sure they're thinking, "Its not my money I'm spending, its the American peoples money." Hyperinflation is the rate of interest we will pay by borrowing from future generations. In Bernanke we and our unborn children trust.

  • Report this Comment On September 01, 2012, at 11:20 AM, DrJCA1 wrote:

    It is interesting and sad to note the attitude of so many people. Borrow money for whatever purpose, worthwhile or not, and if you can't pay it back, so what and too bad for the "suckers" who leant you that money in the first place. While I cannot stand the government or big banks, the horrible ethics of people astound me. Whether it is the feds, a bank, or a friend, if you borrow money, you should make every effort to pay it back and dump the attitude of tough "you-know-what" on them. Whether it is for a house, car, school, or a 10K wardrobe you don't need, it is BORROWED money, not a gift. I guess in our modern world of almost zero interest and ethics, that does not matter.

  • Report this Comment On September 01, 2012, at 11:35 AM, hemifan426 wrote:

    Consumer debt is not the total issue, the article is "foolish" and one of the types of articles that continue to spread the denial. We are in a depression that no one wants to admit. Big oil, gas prices and prices that are elevated by high oil is a huge part of the reason the economy is in depression. Unitl oil is and all commodities are back down to where they belong, prices will continue to inflate and the economy will continue to decline. Oil is 75 bucks a barrel to high and gas is 2.50 a gallon to high. Every product on the market is in some way affected by oil. The national debt, 25% real unemployment and 30% yearly real inflation are monumental issues. Real DEFLATION is what needs to occur for the market to come back into line. Many will attack me for these views, but this is basic econ 101. Jobs have gone overseas, job creation is not the issue, getting jobs back is the issue. The denial within the business community as well as most of what I read on this website needs to be done away with. The issues are real, people know the issues and no one wants to admit them. Blatant greed is clouding the eyes of the business community and fueling the continued depression and deepening of that depression. The employment and inflation numbers are always manipulated by the government. Put in the real numbers and see the truth. Package sizes have shrunken and prices continue to go up. Gas is up 200% and continues to rise. Incomes continue to decline. Inflation at the grocery stores has been 30% a year. Take three years of grocery receipts and to the basic math, I have. There will never be a market where high oil and recovery go together. There will never be a market where declining wages and high unemployment fuels recovery. The treasonous "president" is destroying the constitution and purposely destroying the US. The fed policies are insane, the stimulus failed. Any more manipulation by the fed will only finish off the dollar and treason boys destruction of the US. bernanke is a complete raging idiot. Deal with the issues of reap the rewards. Vote out incumbants, prosecute the current bankers and business "leaders" or continue to watch the destruction. The answers are basic and easy, the wall of denial is the real issue.

  • Report this Comment On September 01, 2012, at 11:37 AM, TMFHousel wrote:

    <<Consumer debt is not the total issue, the article is "foolish" and one of the types of articles that continue to spread the denial.>>

    Sorry, where did I write that consumer debt is the total issue and deny otherwise?

  • Report this Comment On September 01, 2012, at 11:56 AM, whale59 wrote:

    I totally agree with chris2670 and it scares me to see anyone thinking this foolishly! It's amazing that someone could possibly think that millions of people defaulting on their mortgages is alright ("so what"!?). It is sort of like the guy who wants to defraud the insurance company claiming that noone will have to pay, the insurance company has lots of money. And in this case there is a magical bank fairy who is going to bail out the banks' losses and we won't be affected!? Wow! The banks' faudulent marketing and reselling of junk mortgages drove up the values of homes artificially and when the bubble burst and the scheme fell apart we all ended up paying and continue to pay for that handful of crooks who walked away with all of the money.

    And then there is the staggering unemployment rate in the USA. The official "statistics" do not show the huge group of us (me included as an experienced electrical engineer) who lost our jobs to China, Korea, and India, went through our unemployment benefits, and now have no prospect of regaining a job, let alone one in our profession. Estimates of the actual rate of unemployment are somewhere around 25%.

    This article is filtered through some incredibly dark rose colored glasses!

  • Report this Comment On September 01, 2012, at 12:05 PM, TMFHousel wrote:

    <<It's amazing that someone could possibly think that millions of people defaulting on their mortgages is alright ("so what"!?). >>

    People with no incomes and no assets took out $700k mortgages on homes that are now worth $250k. If you can come up with a better solution other than default, please share it.

  • Report this Comment On September 01, 2012, at 12:34 PM, brueggep wrote:

    It's important to note that recent recoveries from recessions were driven by consumer spending. The Great Recession was caused by the bursting of the Housing and Credit bubbles. The recovery from this recession, as people pay down their debt, or the debt is written off, leaves consumers abilty to spend limited to money they have or amounts they are comforable spending. Consumers either no longer have the credit to spend, or are managing their debt more prudently by paying debt down rather than charging it to their credit card. Also, people who still have their housed do not feel as rich as the value of their homes have plummeted.

    Beware of politicians who think that if elected, they can improve the economy and increase employment by lowering taxes is dreaming. It will take more time than they are promising for this recovery to occur.

  • Report this Comment On September 01, 2012, at 12:55 PM, not4in wrote:

    Proverbs 22:7

    The rich rule over the poor,

    and the borrower is slave to the lender.

  • Report this Comment On September 02, 2012, at 12:38 PM, 48ozhalfgallons wrote:

    I've never made more than 30K per year in my lifetime despite a good education. I also became disillusioned with corporate society in my 30's.

    I borrowed 20K for the house I live in and payed it off 16 years ago. The last consumer debt I held was for a new '69 Mustang when I was 21.

    I feel affluent compared to many of my friends who kept borrowing even into their 60's for bigger houses and Bemers. Long ago, those once-upon-a-time "friends" stopped accepting invitations for dinner, etc. I believe it was because of my small house. A few months ago one of those friends asked me to loan him 5 grand.

  • Report this Comment On September 02, 2012, at 12:50 PM, 48ozhalfgallons wrote:

    "People with no incomes and no assets took out $700k mortgages on homes that are now worth $250k. If you can come up with a better solution other than default, please share it."

    Actually, those homes are worth $250k only when they are purchased for that price without debt.

    Moreover, the cost of college tuition is worth no more than what it can be acquired for without debt.

    Borrowing, expecting a favorable outcome sometime in the future, is sheer speculation.

  • Report this Comment On September 02, 2012, at 1:27 PM, 48ozhalfgallons wrote:

    hemifan426: My math and yours are congruent.

    All will inevitably admit to this economy being in depression when productivity ceases as currency becomes worthless. Already, it is apparent that labor is progressively and steeply losing value, hence, 30% inflation for basics.

    One of the defining images of the Great Depression was productive farmers dumping milk, eggs, produce and even shooting livestock because it became no longer profitable to sell.

    Not long ago, (when my income, modest then but greater than now) I was buying Keystone Lite for $9.99 a 30 pack.

    I am finding for sake of credibility, it will soon be necessary to consider changing my user name here to 32ozhalfgallons.

  • Report this Comment On September 02, 2012, at 3:02 PM, JimmyZangwow wrote:

    Hey 48ozhalfgallons

    I did a research paper a couple years ago which required extensive searches through American newspapers of the late 1920s and early 1930s. You hit the nail on the head when you pointed out commodity dumping. What to do with milk was as big of an ongoing story as "New Beer's Eve" (the day booze making and selling was made legal again in 1933).

    Everything that has been going on this last 10-12 years has its counterpart from that era. Reckless spending, "investing" (if you consider buying stocks on credit to be bona fide investing) followed by collapse. They didn't have to deal with currency collapse because a dollar was 1/20th of a 1 oz gold piece, year in and year out. We no longer have that piece of psychological/financial stability, as a dollar now is worth the amount of commodities it will buy, and most of those require more dollars every year on a volume or weight basis.

    Talk of recovery just sounds so ridiculous. Deleveraging was likened to chemotherapy above, and that is apt. I think this patient (US and world economy) will recover and not be the same for at least several decades, as so many assumptions fundamental to building prosperous lives have been violated and those responsible got away with it. It will be very tough to rebuild trust in the system we have.

  • Report this Comment On September 02, 2012, at 6:24 PM, ershler wrote:

    hemifan426,

    I would really love to hear why you think oil should be priced $75 lower.

  • Report this Comment On September 02, 2012, at 9:07 PM, firemachine69 wrote:

    "Whenever the topic of deleveraging is brought up, someone inevitably points out that a lot of the decline is due to people defaulting on debt rather than paying it off. My response is always, "So what?" They're getting rid of the debt, and it's the bank's problem to figure out how to deal with the loss."

    Big point being glossed over here. The irresponsible folks, generally, once they default, cannot take up "new" credit. So long as the bad apples are kept out, we can keep the merry-go-round rolling. (And trust me, I know all about the merry-go-round, I live in Canada).

  • Report this Comment On September 03, 2012, at 10:41 AM, saron1 wrote:

    In the 11 quarters since the recession officially ended, total domestic debt has risen by just $702 billion, or 1.4%. By contrast, in the 11 quarters before the recession began, in those bubble years of 2005, 2006 and 2007, total debt increased by $10.7 trillion, or 28%.

    http://finance.yahoo.com/news/u-debt-load-falling-fastest-04...

  • Report this Comment On September 03, 2012, at 1:36 PM, CathrynMataga wrote:

    http://cdn.debtdeflation.com/blogs/wp-content/uploads/2010/0...

    Steve Keen's private debt to GDP chart -- this guy forecasts 20 years of debt deflation based on this chart. I tend to agree -- I'm not sure why no mention of this here.

  • Report this Comment On September 03, 2012, at 1:42 PM, TMFHousel wrote:

    <<I'm not sure why no mention of this here.>>

    There are at least a million financial analysts in the world. I can't cite them all.

  • Report this Comment On September 03, 2012, at 3:04 PM, Darwood11 wrote:

    @troutfishin

    "The reality of the situation is that in our debt-based capitalist economy, the debtor never becomes debt free and its in the best interests of the creditor to keep it that way."

    I'd agree with that. Particularly when putting one's money into other forms of "investment" may carry more risk and less return. For example, credit cards are wonderful for the banks, as long as people don't go belly up instead of paying off those loans.

    A wonderful example is the "payday loans" which offer short term loans with very little risk, for about 18% annually. Not a bad way to make money.

    I attribute this to the rise of the "service economy" more so than to capitalism. That and the "debt economy" in which people can't save, but have no problem borrowing themselves into oblivion. I think the best example of this is the college loans. It almost boggles the mind that these are supposedly the "best and brightest" in the U.S. who borrow $50,000 on upwards with no comprehension of the impact on their lifestyle once out of school. Apparently one solution is to carry that debt all the way to retirement! I was once married to someone like that. Believe me, she was committed to her ways. I paid off the school loans for her and did her a big favor. But she continued to pile on personal debt. I decided there is name for people like that. She was a "debt junkie."

    Of course, if the debtor gets to be the "800 pound" gorilla as the U.S, has been, then the debtor gets to dictate terms to the lender. But not forever.

  • Report this Comment On September 04, 2012, at 1:54 AM, jomueller1 wrote:

    The picture is flawed. Though it may be true that 30 year mortgages may be had at close to 3%, the question is: Who gets those mortgages?

    Though I have investments roughly the size of the mortgage I want to refinance my "debt to income ratio" is not satisfactory. The premise that the refinancing would improve that picture is irrelevant. The banks do not want to refinance because that means less profit. So it is only the buyer who has the benefit, not the owner.

  • Report this Comment On September 05, 2012, at 5:00 PM, Babwean wrote:

    The big problem we have here is a) Federal debt b) Muni debt c) printing all this money like we did in Zimbabwe. We ARE GOING TO PAY HEAVILY for that period !! d) devisive leadership as we also have in Zimbabwe which created the biggest brain drain the country ever had.

  • Report this Comment On September 09, 2012, at 11:23 AM, STOCKS2076 wrote:

    Morgan - have you no scruples?\

    "Whenever the topic of deleveraging is brought up, someone inevitably points out that a lot of the decline is due to people defaulting on debt rather than paying it off. My response is always, "So what?" They're getting rid of the debt, and it's the bank's problem to figure out how to deal with the loss. "

    Really - if you hate banks so much, and this form of "Deleveraging" (I call it theft) is so great, why don't we REALLY deleverage and kick start the economy! You know - we'll just walk onto the car lot and drive away with the car, and into the store and grab a refrigerator or two - afterall -the loss is the businesses problem and we won't be taking on dept because we never opened our wallets!

    Morgan - default is theft - plain and simple. It is someone who took money and failed to pay it back. It can be as egreious as paying none of it back, or just not living up to the terms, but it is not a good thing and should never be a SO WHAT.

    I hope when you enter you're latter years in life, and your portfolio is more bond heavy that EVERY ONE of your bonds defaults on you. We'll see if you still subscibe to "So what?" then.

  • Report this Comment On September 09, 2012, at 11:34 AM, TMFMorgan wrote:

    <<You know - we'll just walk onto the car lot and drive away with the car,>>

    Presumably there would be a downpayment, and the bank would still own the title to the car. Miss a few payments and the bank takes its car back, and keeps the down payment. Its loss is minimal, and your credit is shot for several years.

    Default is part of banking. I agree that those who take out loans should feel morally obligated to pay them back. But to reiterate, banks made loans to people who stood absolutely no chance of ever repaying them. Not only is that the bank's problem, but if you can think of a better alternative than default, please do share it.

    <<I hope when you enter you're latter years in life, and your portfolio is more bond heavy that EVERY ONE of your bonds defaults on you. >>

    If I put my entire portfolio into bonds backed by homeowners who didn't verify their income, put no money down on a negatively amortizing mortgage and on a house whose price was grossly out of line with historical norms, I would deserve to lose money. I choose not to.

  • Report this Comment On September 09, 2012, at 2:13 PM, STOCKS2076 wrote:

    And there you have it - a lack of scruples.

    A mortgage comes with a promissary note - a promise if you will. Since when is it the obligation of the person RECEIVING the promise to be responsable for ensuring the promise will be fulfilled. It's all part of a society that doesn't want to take responsabilty for their own actions, but blame someone else.

    I suppose you tell your friends who get married to people that may have been promiscous as singles, that it's there own fault if the marraige fails due to infidelity. Do you say So what? "He/she made a vow, but you should have known he/she wasn't gonna keep it."

    Dude - we would be much better off if people lived up to there responsabilities.

    Oh - and clearly you have no concept about business - If I have to repo a car - trust me dude -losses ARE NOT minimal so don't dismiss stealing with the idea of "that didn't hurt much

  • Report this Comment On September 09, 2012, at 2:27 PM, TMFMorgan wrote:

    << Since when is it the obligation of the person RECEIVING the promise to be responsable for ensuring the promise will be fulfilled>>

    Since banking began a few thousand years ago. It is the bank's job to lend money to people who can reasonably pay them back. When they fail at that job, they lose money. This is nothing new.

    I'll ask again: People who make $30k a year with no assets were given $700,000 mortgages on homes now worth $250,000. If you have a better solution than default, please do share it.

    Thanks for the comments,

    Morgan

  • Report this Comment On September 09, 2012, at 2:46 PM, STOCKS2076 wrote:

    Hi Morgan - my comments are not a reflection of whether or not default occurs - you are correct -default can and does occur always has, and always will. I am refering to the flippant attitude towards meeting one's obligations. The So what mentality.

    Here's a thought why don't we just have the USA default on the whole $16 trillion - just stop making payments -so what?

    You and I both know it's a big so what -default should be a big deal and homeowners who default SHOULD lose their homes -they are not their's they didn't pay for them.

  • Report this Comment On September 11, 2012, at 4:50 PM, maninatl wrote:

    Bible verse:

    "The rich rules over the poor, And the borrower is servant to the lender."

    Prov 22:7

    Even though this country has many Christians, they have forgotten what is written in their Bibles. When you borrow, you are indebted to the lender as long as you have the loan. Some people think they are the winners due to this country's bankrupty protection laws. I agree that those laws are good in protecting the borrower from personal harm from the lender. Another group of people think that they are winners if they default on the loan and walk off. Everyone will have to pay for his own actions. It was not the bank's fault that you took up a mortgage thinking that house prices will continue to skyrocket. People have forgotten to live within their means.

    Borrowing money is not a winning proposition if you don't have the means to repay the money. Ben Bernanke, representing the American government, wants people to borrow more, even now! With all his great academic knowledge he doesn't understand the ruin caused by too much personal debt. Else he would not be pushing this country's banks and in turn the people to borrow more. He wants to stimulate the economy by borrowing. It will be too late before the great Ben realizes that economy will not grow better by being saddled with debt.

  • Report this Comment On September 11, 2012, at 5:45 PM, maninatl wrote:

    The banking system (or lending system) as we know it today is going to change drastically if people think that it is not a problem to default on their mortgage and walk away from their payment obligation. Many of those people even continue to stay in their houses till the banks come to repossess the property. Basically they are getting to live for free. Banks are not putting too much effort in repossessing the defaulted houses since they have already been bailed out by the government using taxpayer money and so they now have tons of money more than they would have earned the proper way.

    In future people will not be able to get low money down loan from a bank. Banks will make sure they will get back their money. Banks know that these golden bailouts will happen only once in a lifetime. So in future if they don’t critically assess the borrower’s ability to pay, they are going to lose money.

    The government may still continue providing 3.5% money down loans using Fannie & Freddie. Since it is the taxpayer money these institutions don’t care about losing money. Government will just raise the taxes to bail them out if they lose money. Even if they are not bailed out what do they care. It is not their money in the first place.

  • Report this Comment On September 13, 2012, at 6:26 PM, aleax wrote:

    @maninati, "Even though this country has many Christians, they have forgotten what is written in their Bibles. When you borrow, you are indebted to the lender as long as you have the loan."... or, per the Bible, until the Shemitah comes, that is, as it does every 7 years. “At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbor shall release it; he shall not exact it of his neighbor, or of his brother; because it is called the Lord’s release." (Deuteronomy 15:1-2).

    The debt forgiveness in the Bible is pretty extreme, but less regular ones happen often throughout history. Few know, for example, that the Rosetta Stone (the stele which allowed scholars to decipher Egyptian hieroglyphs) is the announcement of exactly such a debt release, as is much of the text we have from Hammurabi, and so on.

    Recommended book, Graeber's "Debt, the first 5000 years" -- http://en.wikipedia.org/wiki/Debt:_The_First_5000_Years -- it will offer you a different perspective and many details about debt throughout human history,

  • Report this Comment On September 17, 2012, at 6:27 PM, maninatl wrote:

    Yes. There is debt forgiveness that happens in one form or another. Some governments and institutions are more merciful than others. For example, in India (I am an Indian citizen settled in US), one would not get as much leniency and protection as in the US if the loan is not paid back. From a Biblical perspective, a debtor who cannot pay back the loan due to genuine reasons (like loss of his ability to work) must be forgiven. But that does not mean that defaulting on one's loan is without bad consequences. The creditor will in most cases take back the collateral put up for the loan.

    My opinion is that we need to better understand what is going on around us and spot if something is going wrong. In 2005, when US housing prices were rising like there is no end, one of my colleagues told me that everyone must buy a house as an investment. I replied to him that house price increases seem to be without any healthy reason to support the increase and it would stop sooner or later. I didn't have to wait even 3 years to see it happen. Many others saw it coming too since they knew the price increase was due to non-sustainable rise of credit. Today we see the same kind of price increases in China and India. I should say that the price increases in US were more reasonable than the price increases happening today in China and India. Anything that goes up unreasonably will come down.

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