new household debt in america: a look across over time/media/files/pdfs/dwtf/... · 2017. 2....
TRANSCRIPT
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Household Debt in America: A Look Across Generations
Over Time
Carlos Garriga Bryan Noeth Don E. Schlagenhauf
Federal Reserve Bank of St. LouisThe Center for Household Financial Stability and Research Division
11/18/2014
The views expressed here are those of the speakers and do not necessarily represent the views of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.
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How Much Have Different Generations of Americans Borrowed Relative to Their
Income?
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Household Debt in America
3SOURCES: Bureau of Economic Analysis and Federal Reserve Board.
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Household Debt in America
4SOURCES: Bureau of Economic Analysis and Federal Reserve Board.
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Personal vs. Disposable Income
5SOURCES: Bureau of Economic Analysis and Federal Reserve Board.
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Household Debt in America: Interest Rate
6SOURCES: Bureau of Economic Analysis and Federal Reserve Board.
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Interest Rates and Debt
The connection between these factors is not obvious. Why?
Future rates matter as much as current rates.
Expectations.
Demographics (i.e., baby boom generation).
7
David Pereiras Villagra/iStock/Thinkstock
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Debt and the Great Recession
This was the first postwar U.S. recession in which deleveraging has played a key role.
Evidence: States with the largest declines in home values had the weakest recoveries.
Monetary policy may not be able to reach households that are deleveraging.
8
Thomas Northcut/Photodisc/Thinkstock
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Purpose of Today’s Talk
Why do households use debt?
Which are the most important forms of debt over the life cycle?
What role did borrowing play in the financial crisis?
What has been the response of the Fed?
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Purpose of Today’s Talk
Why do households use debt?
Which are the most important forms of debt over the life cycle?
What role did borrowing play in the financial crisis?
What has been the response of the Fed?
These questions will be analyzed through the lens of a life‐cycle framework
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Why Do Households Borrow (or Save)?
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Consumption and Income Over the Life Cycle
12
Consum
ption / Income
Age
Borrowing
Dissaving
Saving
Consumption
DeathRetirement
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The Message from this Framework
Over an individual's life, there is a natural mismatch of income and consumption that can result in borrowing.
Holding debt does not necessarily indicate a future financial problem! Household debt decisions must be consistent with repayment over the
life horizon. What determines consumption?
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The Message from this Framework
Over an individual's life, there is a natural mismatch of income and consumption that can result in borrowing.
Holding debt does not necessarily indicate a future financial problem! Household debt decisions must be consistent with repayment over the
life horizon. What determines consumption?
Current income
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The Message from this Framework
Over an individual's life, there is a natural mismatch of income and consumption that can result in borrowing.
Holding debt does not necessarily indicate a future financial problem! Household debt decisions must be consistent with repayment over the
life horizon. What determines consumption?
Current income Expected future income
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The Message from this Framework
Over an individual's life, there is a natural mismatch of income and consumption that can result in borrowing.
Holding debt does not necessarily indicate a future financial problem! Household debt decisions must be consistent with repayment over the
life horizon. What determines consumption?
Current income Expected future income Unexpected income variations (e.g., job loss)
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Average Life‐Cycle Income in the United States
17SOURCE: Survey of Consumer Finances.
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The Message from this Framework for Borrowing
1. Life‐cycle motive: Borrow to go to school and repay when in the labor force.
2. Smoothing motive: Maintain stable consumption pattern when income fluctuates.
3. Insurance motive: Mitigate the negative/positive effect of shocks (i.e., market and self‐insurance).
4. Purchase of large ‘ticket’ items: These items provide service for many years.
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What Are Households Doing With All This Debt?
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Evidence: Unsecured Credit (Credit Cards)
20SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Evidence: Mortgages
21SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Evidence: Auto Loans
22SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Evidence: Student Loans
23SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.Note: Data prior to 2003 are not consistent
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Borrowing and the Life Cycle
24
Some of these forms of borrowing happen at different ages over the life cycle
Young individuals finance college
Newly formed households purchase homes
Middle‐aged households tend to use credit more frequently
All households finance auto purchases
Pavel Losevsky/iStock/Thinkstock
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Changes in Borrowing Behavior during the Great Recession
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Why Is the Great Recession Recovery Different? The Great Recession had a significant (negative) impact on households'
Earnings ‐ rewards to all types of labor, including entrepreneurial labor.
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Why is the Great Recession Recovery Different? The Great Recession had a significant (negative) impact on households'
Earnings ‐ rewards to all types of labor, including entrepreneurial labor.
Income ‐ earnings plus capital income plus government transfers.
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Why is the Great Recession Recovery Different? The Great Recession had a significant (negative) impact on households'
Earnings ‐ rewards to all types of labor, including entrepreneurial labor.
Income ‐ earnings plus capital income plus government transfers.
Net Worth ‐ the value of all assets net of debt.
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Income Distribution in Large Postwar Recessions
29
1980‐1982 RecessionIncome Group 1979 1982 1985 ∆79‐82 ∆82‐8595th Percentile $191.8 $189.6 $209.5 ‐1% 11%Median $71.9 $65.0 $71.1 ‐10% 9%20th Percentile $33.1 $26.3 $29.1 ‐20% 11%
2007‐2009 RecessionIncome Group 2006 2009 2012 ∆06‐09 ∆09‐1295th Percentile $289.7 $277.8 $270.2 ‐4% ‐3%Median $83.2 $76.0 $74.5 ‐9% ‐2%20th Percentile $33.6 $26.9 $25.0 ‐20% ‐7%NOTE: All values are in thousands of 2012 dollars.SOURCE: Federal Reserve Bank of Minneapolis 2013 Annual Report.
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Average Earnings and Net Worth by Age
30SOURCE: Survey of Consumer Finances.
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Average Earnings and Net Worth by Age
31SOURCE: Survey of Consumer Finances.
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Average Earnings and Net Worth by Age
32SOURCE: Survey of Consumer Finances.
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Average Earnings and Net Worth by Age
33SOURCE: Survey of Consumer Finances.
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Has the Income Distribution in the United States Actually Changed?
34
Changes in Income Distribution30‐50 Ratio 50‐90 Ratio
Date Earnings Income Net Worth Earnings Income Net Worth1992 3.62 1.69 3.83 3.35 2.94 7.181998 2.80 1.67 4.00 3.22 2.78 6.882004 2.68 1.69 3.98 3.50 3.00 9.022007 2.69 1.64 4.53 3.47 2.98 7.552010 3.40 1.62 5.23 3.72 3.11 12.352013 3.30 1.64 5.49 4.07 3.31 11.58
SOURCE: Survey of Consumer Finances.NOTE: Median earnings for 1992‐2013 respectively are $36,584, $40,585, $42,046, $41,567, $37,039, and $33,479 in 2013 dollars.
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How Has the Great Recession Impacted Minorities?
35SOURCES: Current Population Survey Annual Social and Economic Supplement.
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How Has the Great Recession Impacted Minorities?
36SOURCES: Current Population Survey Annual Social and Economic Supplement.
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How Has the Great Recession Impacted Minorities?
37SOURCES: Current Population Survey Annual Social and Economic Supplement.
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How Has the Great Recession Impacted Minorities?
38SOURCES: Current Population Survey Annual Social and Economic Supplement.
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Changes in Four Major Consumer Debt Categories
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Unsecured Consumer Credit (Credit Cards)
40SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Unsecured Consumer Credit (Credit Cards)
41SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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42SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
Unsecured Consumer Credit (Credit Cards)
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Unsecured Consumer Credit (Credit Cards)
43SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Unsecured Consumer Credit (Credit Cards)
44SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Mortgages
45SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Mortgages
46SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Mortgages
47SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Mortgages
48SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Mortgages
49SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Auto Loans
50SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Auto Loans
51SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Auto Loans
52SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Auto Loans
53SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Auto Loans
54SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Student Debt
55SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.Note: Data prior to 2003 is not consistent
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Student Debt
56SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.Note: Data prior to 2003 is not consistent
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Student Debt
57SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.Note: Data prior to 2003 is not consistent
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Student Debt
58SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.Note: Data prior to 2003 is not consistent
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Student Debt
59SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.Note: Data prior to 2003 is not consistent
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Combining All Forms of Debt
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Holding Only Mortgage Debt: 1999
61SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Only Mortgage Debt: 2005
62SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Only Mortgage Debt: 2008
63SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Only Mortgage Debt: 2010
64SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Only Mortgage Debt: 2013
65SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Mortgage and Auto Debt
66SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Unsecured Credit and Auto Debt
67SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding Mortgage, Unsecured, and Student Debt
68SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Holding All Four Types of Debt
69SOURCE: FRBNY Credit Panel / Equifax Based on Authors’ Calculations.
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Borrowing Behavior: Pre‐ and Post‐Crisis
The Great Recession brought sizable changes in borrowing behavior.
Boom and a bust in credit cards, mortgages and auto loans.
Significant deleverage in three debt categories.
The only exception is college debt, which has been increasing since 1999.
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Households’ Balance Sheets, the Economy and Monetary Policy
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Household Balance Sheets and the Great Recession Prior to 2005
Interest rates and mortgage rates were low.
House prices were increasing, and the economy was growing.
Households had wealth and could spend.
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Household Balance Sheets and the Great Recession Prior to 2005
Interest rates and mortgage rates were low.
House prices were increasing, and the economy was growing.
Households had wealth and could spend.
After 2005
Interest rates and mortgage rates were still low, but…
House prices were decreasing, and growth was weak.
Households wealth declined, and spending was reduced.
The lack of spending and the decline in construction magnified the recession. 73
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What Has Been the Fed’s Response?
The Fed has the mission to be the lender of last resort.
By providing liquidity and keeping rates low, it provides a scenario conducive for stable growth.
These policies are effective in a low‐inflation environment.
The role of quantitative easing (QE).74
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St. Louis Fed Initiatives Why is the Fed interested in microeconomic data?
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St. Louis Fed Initiatives Why is the Fed interested in microeconomic data?
Two important programs:
1. The Center for Household Financial Stability: This is a new research initiative of the Federal Reserve Bank of St. Louis focused on rebuilding the household balance sheets of struggling American families. http://www.stlouisfed.org/household‐financial‐stability
2. Econ Ed: Promote economic literacy for students (elementary, middle, HS, and college), and consumers. http://www.stlouisfed.org/education_resources/
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Questions?
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