I find the graph above, courtesy of the New York Fed via Calculated Risk, pretty evocative. It illustrates total household debt from 1999 to the present broken out into its various subclassifications with student debt added in the two bars on the right. As a sidebar and to place indebtedness into slightly better perspective according to the Department of Education student loan indebtedness has more than tripled since 1999 compared to home loan indebtedness which had just about tripled from 1999 to its peak in 2008.
If, as economist Richard Koo has averred, we are in a household balance sheet recession and that whatever other measures are taken economic growth won’t resume at anything resembling a healthy level until deleveraging has taken place, i.e. household aren’t holding as much debt, we may have a very long time to wait. To my untutored eye it appears that indebtedness is moving sideways, like so much else in the economy.
I would also make the claim that efforts to date like the Car Allowance Rebate System AKA Cash for Clunkers and the first time homebuyers tax credit are vain attempts at reinflating the bubble, doomed to failure and, in fact, counterproductive while pump-priming measures like the infrastructure spending provisions in the ARA are at best only effective very indirectly. More direct measures, an ocean of alphabet soup of them, e.g. HAMP, haven’t been effective largely because they haven’t attracted lenders to them.
Let’s assume, arguendo, that we are, in fact, experiencing a balance sheet recession which won’t remit until household indebtedness is substantially reduced. What policy measures would effect that? Taking into account the large proportion of household debt held by the topmost quintile of income earners, are these measures likely to be implemented?
I have one more rather argumentative question. Which model comports better with reality? That policymakers have been striving to fix what’s wrong with the economy or that they have been more or less indifferent to what’s wrong with the economy and have been focused like Bill Clinton’s laser on measures that would please prospective contributors and/or voters?