The Start of the Debt Cycle

The Start of the Debt Cycle

The Start of the Debt Cycle

The impasse created by bad policy led to a slowdown in buying, not only in .the housing industry, but also in related industries such as appliances, carpeting, and real estate. A parallel predicament was evident in the automobile industry and in education, both of which had become heavily dependent on consumers' use of loans to buy their products and services. The answer came in the form of longer term loans. By extending the payment period, lenders enabled people with relatively low incomes to afford the monthly payments. Another boom was on.

By the mid-sixties the generation of bankers who had been through the Great Depression was retiring and turning operations over to younger, more aggressive people who had grown up with the debt-oriented mentality. The need to expand the credit base meant that even more loans had to be made available to more people for longer periods of time.

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By the seventies virtually every segment of the economy was dependent on credit. Even consumer items such as food, clothing, medical care, and travel were dependent on credit through credit cards and small loans. Lenders extended longterm loans based on equity in assets. Thus consumers could borrow on the appreciated values of their homes, stocks, and businesses. But since the equity was dependent on the availability of loans to subsequent buyers, this created the need for even more lending. The economy was returning to the pre-Depression mentality of growth through debt.

In the seventies the government was no longer just the guarantor of loans. It was the stimulator of massive debt. The economy had become totally dependent on consumers' borrowing to keep it going. The traditional requirements for qualifying borrowers fell by the wayside as lenders sought wider markets for their loans. No longer was the rule in mortgage loans 25 percent of the husband's salary. Now it was 40 percent of both incomes. Car loans were extended to sixty months and often had balloon payments of up to 40 percent at the completion of the loan period.

By the eighties debt had become the engine that fueled the entire economy, and consumers were forced to borrow even the equity out of their homes in order to educate their children and purchase cars. Is it any wonder that in the midst of this steamroller of debt-financing the average family experienced financial problems? It is interesting that the increase in theAmerican divorce rate can be tracked on a curve matching the growth of debt in the country. Does the increase in divorce cause the debt to increase, or is it the other way around? I believe that the increased incidence of divorce is a direct result of too much debt. Nearly 80 percent of divorced couples between the ages of twenty and thirty state that financial problems were the primary cause of their divorce.

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