Paying Down Debt, Reducing New Borrowing, and Stricter Lending Standards Drive Household Deleveraging

by Sabrina I. Pacifici on April 23, 2013

“Since the financial crisis, households have reduced their outstanding debt by about $1.3 trillion. While part of this reduction stemmed from a historic increase in consumer defaults and lender charge-offs—particularly on mortgage debt—other factors were also at play, according to a recent study from the Federal Reserve Bank of New York. In their study, The Financial Crisis at the Kitchen Table: Trends in Household Debt and Credit, Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw reveal that households actively reduced their obligations during this period by paying down outstanding debts and reducing new borrowing. These choices, along with banks’ stricter lending standards, helped drive this deleveraging process. However, while this process has helped improve household balance sheets, it has also likely contributed to slow consumption growth since the beginning of the recession. As households actively pay down debts, they may be forced to reduce their previous consumption levels. Thus, the trajectory for consumer indebtedness has important implications for consumption and economic growth going forward.”

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