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ROBERT ARMSTRONG: In the last financial crisis, household debt was at the very centre of the storm. Bad US mortgages and bad mortgage securitizations forced the entire global financial system into disarray. This time, the crisis is caused by a virus, not by a financial product. But it is still worth asking whether the $14.3 trillion in US household debt might not act as a dangerous accelerant, making an already serious crisis much worse.
There have been 36 million new jobless claims since the COVID-19 virus took hold of the US economy. If those translate into waves of defaults and personal bankruptcies, the ripples will be felt across the world. But there is some good news.
First, the US government has shovelled billions of dollars directly into the US economy, cutting checks directly to households, supplementing unemployment insurance, and more. Second, both borrowers and lenders seem to have learned some important lessons since the last crisis. Household debt relative to household incomes has come down significantly over the last 10 years. Falling interest rates have amplified this effect. Household interest payments relative to household incomes are not just low; they are at all-time lows.
But there is some less encouraging news as well. Much of the deleveraging that has taken place in US households over the last 10 years has been in mortgages. Americans owe less on and have more equity in their homes than they have in years. But if you take those mortgages out of the picture, the deleveraging looks much less impressive. Americans owe only a little less on their credit cards and against their cars than they did a decade ago. Even before COVID-19, hit delinquencies on auto loans and credit card loans were already rising, as underwriting standards have fallen as the last crisis has disappeared into the rearview mirror.
Many of the job losses caused by COVID-19 are in industries like hotels and restaurants that employ a lot of hourly workers who may not own homes but are likely to owe money on their cars and on their credit cards. Government support should keep these and other workers current on their debt payments for now. But eventually, the government's support will stop. And if the jobs have not returned by then, there will be a wave of defaults and personal bankruptcies, the consequences of which we can only guess at.
