A culture of debt

Economist Perhaps the greater legacy of Federal Reserve Chairman Alan Greenspan is the way he transformed people’s attitude to credit and debt. During his term of office not only the national debt of America, but also personal debt, increased substantially.

Since the Great Depression of the 1930s, people in America have been naturally reluctant to borrow money. But for this generation, in the US and increasingly globally, debt has become respectable. From an early age, young people take out loans to pay their way through college and borrowing against equity in real estate is now at record levels. Re-mortgaging your home was unheard of generations ago: a second mortgage was an indication of a household in trouble. But today it is routine.

All this is possible because credit is easy and interest rates are low. Banks are encouraged to lend, and often do so irresponsibly. In some states it’s possible to get a 100% mortgage – in other words with no down – payment –equivalent to four times a couple’s combined annual salary. The market is constantly coming up with new financial products and new ways of extending credit to ordinary people. General Motors, whose automotive business is in decline, now sells home equity loans though a subsidiary: it’s the only part of company that has been consistently profitable in recent years.

The reason for this boom in money lending is clear – to fund consumer spending. As long as people are spending, economic growth continues. In other more conservative borrowing cultures, like Germany, economic growth has slowed because in times of uncertainty people tend to save their money, rather than borrowing and spending to make themselves feel better.

So does the accumulating debt matter ? Some say that as long as asset values rise faster than debt, there’s no problem. In 2005 Americans were twelve trillion dollars in debt, but their personal assets stood at 64 trillion dollars . Others argue that we are sitting on a time-bomb.

Asset value will not continue to rise indefinitely and when they crash, millions of people will be plunged into negative equity. Liabilities remain the same but assets can go up and down in value. This was the case with stock market values, which saw sharp falls around 2000. Crisis was averted only because investors moved their money into real estate.

For millions of Americans this only confirmed the culture Alan Greenspan had been promoting – debt is good. And if he turns out to be wrong – well, we all had fun in the meantime.