A recent study published by the New York Federal Reserve concludes that the dramatic decline in household debt since the start of the financial crisis is due to a number of factors including tighter lending standards, increased consumer defaults, lender charge-offs (especially with mortgages), and consumers paying down debts and reducing borrowing.
Using new data collected by the Federal Reserve, the study authors note a “steep run-up in consumer debt from 1999 to 2008, followed by a pronounced decline through at least third-quarter 2012.” Consumer debt rose 170% from March 31, 1999 to the end of the third-quarter of 2008, when it reached $12.7 trillion. Since that time, consumers reduced their debt by $1.4 trillion or about 11%.
Based on the data, the authors conclude that tighter lending standards played “a major role” in changing consumer behavior but consumers’ choices also contributed. The authors note that the decline in debt is related to the rise in unemployment in the second half of 2008 and the data suggests that consumers took precautionary moves to build savings and available credit.
The authors also note that the decline in household debt improved household balance sheets but “likely” contributed to the slow growth in consumption since the recession began.
