Once Again, Debt Is Miscast as the Villain

Saturday, March 24th, 2007

David Leonhardt says, Once Again, Debt Is Miscast as the Villain:

But whatever happens, it’s important to remember that the mortgage market is following a classic cycle that nearly every other form of consumer credit has also followed. When somebody comes up with an innovation, be it consumer loans, credit cards or creative mortgages, it inevitably leads to an explosion of borrowing that includes a good amount of excess and downright abuse. After the abuse is cleaned up, though, most families end up better off.
But think about what life was like before easy money. Think about how hard it would be to buy a house or pay for college if a 42 percent interest rate still seemed normal.

Some of the changes are surprisingly recent. Just a generation ago, a temporary setback, like illness, divorce or job loss, was much more likely to force a family to take drastic measures than it is today. That’s in large measure because of debt, which allows families to smooth out the rough edges of their financial lives.

You can see this change in the national statistics on consumer spending. Since the early 1990s, the peaks in spending growth rates haven’t been as high as they were in the 1960s, ’70s and ’80s, but the valleys haven’t been as low, either. Not coincidentally, recessions have come less often over the last two decades and they have been fairly mild.

Mortgages are a big part of this story. Thanks to the enormous amount of foreign capital that has flowed into the market over the last decade — the same influx of capital, yes, that helped cause the boom to get out of hand — the mortgage business has become bigger, more competitive and more innovative.

If you take out a mortgage today, you’ll pay thousands of dollars less in upfront fees than you would have in the mid-80s. (Those fees have fallen by 80 percent in just two decades.) Home buyers who know they’re going to live in their house for only a few years now also have the ability to get an interest rate that reflects their situation. The 30-year fixed-rate mortgage isn’t the only game in town.

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