The U.S. economy is in the midst of a credit crunch and more and more economists are tracing its origins not to the housing meltdown, but to the credit card.
Steven Fazzari, economics professor at Washington University in St. Louis, says rising consumer indebtedness is finally slamming the brakes on the economy.
"For more than two decades we had consumer-led growth, which actually mitigated the recessions of the early 1990s and 2001," Fazzari said. "Part of the reason we had mild recessions was due to consumer strength. But we kept building up debt.
"It was also a period of falling nominal interest rates. This meant that every cycle of low interest rates was another opportunity for people to refinance on better terms and extend their spending further," he said.
In simple terms, consumers are now just tapped out.
According to the latest Federal Reserve Consumer Credit report, total revolving debt by consumers, which consists primarily of credit cards, is at an all-time high of $947.4 billion.
"Americans are in more debt than ever before," said Brad Stroh, co-CEO and co-founder of Bills.com, an online personal finance Web site. "The credit card industry could be the next domino to fall if consumers don't get a handle on their personal finances soon."
Fundamental changes
Fazzari sees fundamental changes in the economy that are reducing the effectiveness of consumer spending as an economic driver.
Part of the problem is the current debt burden. Part of the problem, he says, lies in the fact that its harder and harder to get credit. Even the Federal Reserve Bank's move to lower interest rates doesn't give Fazzari much hope for a turnaround.
"Bernanke deserves credit for creative approaches to containing instability in financial markets," Fazzari says. "But the source of the recession comes from structural problems that need to be changed. Bail-outs may help prevent everything from cascading further, but the Fed does not have the tools to solve these problems. ...
| • | Consumer Debt, Not Housing Bubble, May Be Root of Economic Woes
Too much revolving debt makes recovery more difficult ConsumerAffairs.com, Tuesday, April 1, 2008 Byline: Mark Huffman, ConsumerAffairs.com |
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