Government statistics show household debt fell by over $600 billion since the start of the recession. But how much of this was involuntary debt reduction due to foreclosures and bankruptcies? N.C. State University economist Mike Walden answers.
“That is an excellent question, because many commentators saw the reduction in debt over the last couple of years and praised it and said, well, this is a result of households being more frugal, knowing they have to pay down on debt in order to get their financial house back in order.
“Well, unfortunately, now we have some data from the Federal Reserve that shows that households didn’t pay down on their debt at all — that, in fact, all of the reduction in debt was … involuntary. It was due to foreclosures and bankruptcies. In fact that amount of debt reduction from foreclosures and bankruptcies came to $800 billion. The total reduction of debt was $600 billion. So actually over the period of the recession, households continued to add to their debt to the tune of about $600 billion.
“Now, actually, that’s not all bad because if you look at that as a rate of increase, it was a very minor increase in debt — about .5 percent annually, whereas prior to the recession households were adding to their debt at the annual rate of about 6 percent.
“So we did become more frugal, but we did not really pay down on debt.”