Debt Paralyzing Life during the Foreclosure Era
America is passing through the foreclosure era. It has not yet become history. Debt is paralyzing life as one day follows another for the ordinary American. A couple refinanced their mortgage. Although the rate was relatively lower and they could have shouldered more debt but they paid off a big chunk of the due balance. Why? Just because it gave them a good feeling to be owing less.
Once upon a time it would have been considered patriotic to be thrifty and frugal. But now the opposite is being touted. Unless the consumers pick up once more the spending culture the country cannot be saved. Unless one borrows the money for spending will not come.
But everyone has now become cautious and this is now jeopardizing the economic recovery. They are not going on trips to the mall; they are paying off credit card dues and struggling to bring back equity to their houses. Although mortgage rates have dropped to historic low levels there is hardly any demand for it.
Some are having no other alternative but to trim their debts – their houses are being taken away by foreclosures and thus erasing their debts. For others the morning after the partying is calling for sober prudence. Half of the Americans have suffered loss of jobs or have become underemployed during the past two years and a half. The stock portfolios of the people are far from being what they previously were.
The technical word for it in economics is ‘de-leveraging’. In normal conditions during each quarter the citizens borrow more and banks grant more loans. But now the opposite is happening. It has been in vogue for more than the last two years. Joe has gone into hibernation after years of over eating. James Grant has aptly described it that if money is in the minds of people they are not disposed to mint it now.
This type of individual restraint does not bode well for the GDP. The total amount of credit of households has shrunk through seven running quarters. The mortgage debt has gone down by $462 billion reached during its peak. Borrowings of credit card are lower by $126 billion. The automobile loans have dropped by $122 billion and home equity lines by $77 billion.
These figures will paint another picture of the economic crisis of the nation. The failures of the banks and the bailouts during 2008 painted a picture of a grim horrible battle. The subsequent hum of falling credit since then indicates an army thumping into retreat.
