Consumer credit outstanding reached $2.58 trillion in June, the highest level since its peak in July 2008.1 At a time when debt, both personal and government, has become a four-letter word, does this development mean a return to the bad old days of a leverage-fueled bubble economy? Like most things we learn about these days, there’s some good news and some worrying news.
When I started driving, a gallon of gas cost about 25 cents and gas company credit cards were first appearing. I wasn’t allowed to use one of those cards because “you don’t buy what you can’t pay for,” even if I agreed to zero out the balance every month. To this day I remain personally averse to debt even though I’ve begun to recognize some of the benefits in paying over a few years for something you’ll use over those years. I also recognize that having affordable credit available to responsible borrowers is a crucial element in a functioning modern economy. Growth in “good” credit is especially important now as the economy continues to convalesce after the 2008 financial crisis.
Signs of good credit are evident in the auto market. For example, the average age of the 245 million cars on the road in the U.S. has reached 11 years, as cautious and aging consumers have delayed replacing the old jalopy.2 In July, however, the Fed’s Senior Loan Officer Survey reported increased demand and an easing of lending standards for auto loans, and loans are up by some $31 billion over the past year. We’re now on track to buy over 14 million cars per year, contributing to the modest manufacturing revival that’s a bright spot in the current economic cycle. Expanding credit is part of making that healthy process possible.
The worrying part of credit expansion, on the other hand, is the student loan market. There is currently some trillion dollars in student loans outstanding.1 Students who spent the recession in school are now faced with huge debt burdens and an economy that is not creating jobs fast enough to provide them with the means to repay those loans. I’d certainly rather see people take on debt to enhance their human capital than borrow to buy a new car, but is that what’s actually happening? We know that unemployment is markedly lower among college graduates than among the general population, but it’s still elevated among recent grads. Are these loans buying time rather than skills, contributing to this decade’s version of the ninja (no income, no job, no assets) home loans of the financial bubble? The batch of young professionals I see from my office who are dutifully repaying their student loans indicates that many are not, but the rate of loan expansion alone suggests that many others may mean trouble down the line.
So while I applaud the current expansion of household debt as evidence that the damage done by the financial crisis won’t last forever, I’m also wary of how that debt gets used. Despite my parents’ antipathy to gas station credit cards, debt used to fund long-lived assets or to invest in productive physical or human capital is critical to the functioning of a modern, dynamic economy. It’s the debt that pays for inflated home development or for schooling that doesn’t educate usefully that has been, and will continue to be, a threat to prosperity.
1. Federal Reserve Bank of New York, 5/31/12.
2. Experian Automotive, 7/27/12.