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January 08, 2010

Shrinking debt

Households went into this recession with record high debt levels. With the recession now in its second year, have households taken action to reduce their debt exposure?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Yes, they have. In fact, since 2008 consumers have paid down a whopping $126 billion on their debt. That's a 5 percent reduction. We have never before seen that kind of action by consumers. So consumers have certainly become frugal. And really, they've been forced to. What the recession did was really reduce asset values. People have seen their stock values go down. They've seen their home values go down. Their debts, though, were still there. Their debts didn't go down. So they have these high debt levels that have been exposed, and they've had to take action. They simply had to take action to what's called re-balance their financial sheet. Secondly, many banks have become very iffy about consumers. So if a consumer is going to get a loan now, they have to have a better financial balance sheet. So these forces have combined to really motivate consumers to pay down their debt. And they really have, for the first time in 50 years - I can't emphasize this enough - we've seen a net reduction in consumer debt."

Posted by Dave at January 8, 2010 08:00 AM