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KAI RYSSDAL:One of the difficult, but mostly positive lessons that Americans have learned from the credit crisis is that we ought to be saving more. The Federal Reserve keeps track of how much we collectively owe. And it says that last year, for the first time since 1945, household debt actually fell. So, we are all saving and skimping, right? Nah. Turns out we have less debt because we’re walking away from it.
From Washington, Marketplace’s Nancy Marshall Genzer explains.
Nancy Marshall Genzer: The Federal Reserve says the total debt of U.S. households shrank more than one and a half percent last year. But the debt wasn’t paid off; the banks wrote it off as a loss, and the Fed recorded lower consumer debt levels.
Carey Leahy: People are, in some sense, walking away from their properties and, in some sense, reducing their debt loads through jingle mail.
Carey Leahy is an economist at Decision Economics.
Leahy: That means you leave the keys in the mailbox and then walk away from your property.
That’s essentially what Christopher Betcher did. He declared bankruptcy almost two years ago. The financial crisis buffeted Betcher on a number of fronts. He appraises houses in northern Minnesota. His income went from a quarter million dollars in 2004 to $10,000 last year. Now, he has a second job. And, with no more debt, Betcher and his wife are starting to spend again.
Christopher Betcher: I mean, there’s definitely some expenses we’ve done in the last six months that we would not have done, if it hadn’t been for having that weight lifted off of us.
Betcher just bought his wife a $900 ring for their anniversary. But he’s going to pay it off in six months, to avoid interest. He doesn’t use credit cards anymore.
Brian Bethune is seeing that a lot. He’s an economist at IHS Global Insight. Bethune says debt-free consumers are starting to spend. But they’re not loading up the plastic.
Brian Bethune: It’s mainly cash and debit cards that they’re using. So that’s OK. It still rings the cash registers, in so far as the retailers and restaurants and they’ll take it.
But cash will only take the economy so far. You’re not going to put a house on your debit card. Bethune says both banks and consumers will have to get comfortable with credit again for the economy to recover fully.
In Washington, I’m Nancy Marshall Genzer for Marketplace.