Excessive leverage—too much household debt—remains the scourge of our economy. It holds back consumer spending and results far too often in massive economic distress for millions of American families facing record-high foreclosures. Too much household debt also leaves banks reluctant to extend new loans for home purchases and business expansions because these lenders already have billions of dollars in bad loans on their books and don’t want to throw good money after bad.
This all slows business investment. Businesses want to meet the existing demand of consumers and other businesses primarily with their existing capacity. Businesses have no incentive to quickly build up new capacity unless households can dig out from under the mountain of debt more quickly than has been the case so far.
Helping American workers and their families deleverage can occur through three channels. One is to leave the decline of debt to market forces through massive home mortgage foreclosures and tight lending standards that prevent the expansion of much new credit. Another, less-painful possibility for households is the refinancing of existing debt into lower-interest-rate debt, thus making it easier to repay their total outstanding debt. And the final way to deleverage household debt is an increase in after-tax incomes. Incomes can grow due to more jobs, higher wages, lower taxes, and better unemployment insurance benefits, among others.
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