Released: August 23, 2006

Unwinding the credit boom

Source: By Robert J. Samuelson, Washington Post (Free Registration)

We are at the end of the credit boom—certainly the six-year boom and maybe the 60-year boom. Has any society ever created so many ways for people to go into hock? In 2003 Americans had 1.46 billion credit cards, or five per person. Home mortgages total $9 trillion, and some initially don’t require borrowers to repay all their annual interest. In 1946 households had 22 cents of debt for each dollar of disposable income. Now they have $1.26. Behind these numbers lies a profound social upheaval: the “democratization” of debt. Everyone gets to borrow. But this process may have reached its limits.

Although Americans are routinely stigmatized as credit junkies, that’s unfair. Of course some people overborrow, and some financial institutions lend abusively. Still, the democratization of debt has generally been a good thing. Millions of families can now borrow for college, cars and clothes. The biggest boon has been the expansion of homeownership, up from 44 percent of households in 1940 to 69 percent today. (Three-quarters of household debt consists of mortgages.) At heart, Americans’ appetite for credit reflects national optimism. We presume that today’s debts can be repaid because tomorrow’s incomes will be higher.

The origins of today’s credit culture date to the 1920s and the advent of installment lending for cars and appliances (stoves, refrigerators, radios), says economist Martha Olney, author of “Buy Now, Pay Later.” Attitudes changed. In the 19th century, “it was thought that only irresponsible families bought on credit,” she says. “By the 1920s, it was only foolish families that didn’t buy on credit and use it while they were paying for it.”

Read Full Article: Unwinding the credit boom