Newspaper article The Christian Science Monitor

The Thinning of America's Wallets ; Prolonged Downturn Creates Sudden Rise in Credit-Card Debt and Personal Bankruptcies

Newspaper article The Christian Science Monitor

The Thinning of America's Wallets ; Prolonged Downturn Creates Sudden Rise in Credit-Card Debt and Personal Bankruptcies

Article excerpt

The US economy is now skirting along the edge of deeper financial problems.

Both personal and corporate bankruptcies are on the upswing. The stock market, the great wealth creator of the 1990s, is shedding billions of dollars. And for the first time in 10 years, more people are carrying balances on their credit cards instead of paying off their monthly bills - a sign that consumers may be starting to feel the pinch. As credit-card companies are quick to note: Their losses are rising.

These problems could mean more bumps in the road ahead. Already, many merchants are expecting a less-than-wonderful holiday season - at least compared with the past few seasons. And, without a flush consumer, the US economy may not post the rebound many economists have been expecting.

"We are at a situation here where we could develop a much weaker consumer in terms of balance sheets," says Richard Curtin, director of consumer surveys for the University of Michigan in Ann Arbor. "One sign of this is the consumer has reacted to the tax rebate with a great sense of caution about their future finances." A significant percentage of people have put their rebate in savings or have used it to pay down bills.

It's not unusual - and is even logical - for economic downturns to lead to other financial problems. Companies in turmoil may not pay their bills as quickly. This can affect individuals such as independent contractors, a growing category of workers. Or, laid- off employees may defer making payments on their debt or decide to declare bankruptcy.

But economists point out that the financial problems so far are all manageable and are not as bad as those of the early 1990s, when a collapse of the savings-and-loan industry cost taxpayers $100 billion. In fact, the US banking system is considered to be in relatively good shape, considering the downturn in the economy.

"Banks are very healthy for this stage of the cycle. They are looking to make loans," says Brian Fabbri, chief economist for BNP Paribas, an investment banking firm in New York.

New moneymaker: fees

Yet banks are also healthy because they have changed their own game. Although they still make loans, they would rather get fees for transactions.

"The truth is that banks don't want to be lenders of money. They want to arrange financing," says John Puchalla, an economist at Moody's Investors Service in New York.

But without question, other stresses appear to be building. Personal bankruptcies are soaring. The Administrative Office of the US Courts reports that in the second quarter, new bankruptcies rose 24.5 percent over the same period a year ago.

Filings are now on track to surpass the record-breaking year of 1998, says the American Bankruptcy Institute (ABI) in Alexandria, Va. …

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