Households Deleveraging from FRBNY

FRBNY has just released its Quarterly Report on Household Debt and Credit for Q2 2012 with a follow up update from FRBNY Liberty Street Economics.

In the update to their earlier report, FRBNY economists confirm continued overall deleveraging trend of the US households.

While on relative scale trends appear in somewhat opposite directions (e.g. credit cards vs. student loans chart vs. mortgage debt), on aggregate households are reducing their debt positions, primarily by a) reducing the volumes of new mortgage liabilities; b) paying out existing mortgage; and c) due to foreclosures/default.

Here’s quite indicative chart from the FRBNY report that gives some feel of the actual numbers:

The overall deleveraging trend is interesting. A similar trend was witnessed before. At the minimum Hyman Minsky observed the post-Great Depression / post-WWII US economy the increased deleveraging leading to a more conservative appetite for any new speculative debt dealings.

Minsky suggested that had helped keep the financial system in check at least through 1950-60s and partially into 1970-80s (not accounting for the obvious real economy shocks). That post-WWII financial setup ensured responsible due diligence on the part of commercial banks, and stricter financial market infrastructure. It also allowed for more or less effective regulation in then environment at the time and for, not often talked about, proactive monetary policy by the Fed.

Today, while current deleveraging may be a positive trend in relative terms compared to pre-crisis peak … it may be a bit too early to claim a financial environment of serene stability…

Simple logic would suggest continuous transformation in the financial system to be ongoing impacting the real sector as well (e.g. business loans). The scale, magnitude, of these changes and their cross-sector penetration should remain on the radar of acute observer.

P.S. Related is this FRBNY analysis tracks historical adaptations of the financial system.

Just brief thoughts, and more on this hopefully soon.