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The massive swing in non-mortgage debt reflects the failure of our financial system to transmit the Fed's accommodative monetary policy to consumers. The distinction between "forced" vs. "voluntary" deleveraging may not adequately capture the full impact of this. When banks have cut credit lines or refused to extend new credit as consumers have paid down existing balances, presumably this counts as "forced". But many borrowers who have never missed a payment are still paying 18% or 20% on their outstanding balances, creating an extraordinary incentive for "voluntary" reduction. Credit spreads have not narrowed for consumers as they have for businesses. Moreover, the banks' cutting back of credit lines and and (prior to recent legislation) raising rates on outstanding balances to creditworthy borrowers has also increased consumers' perception of vulnerability associated with indebtedness. Too narrow a definition of "voluntary" will miss out the degree to which deleveraging by consumers is a consequence of institutional failure.
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Mar 22, 2011