Consumer Borrowing On the Rise
A recent report from the New York Federal Reserve indicates that consumer borrowing is on the rise. This apparent “healing of the credit markets” is widely seen as a good sign for the economy.
It often feels, however, that what is good for the economy is bad for consumers. When was the last time you thought about how great it would be to incur more debt? These types of bizarre economic realities also come up in my everyday practice. When counseling clients about potential bankruptcy cases I have to tell them similarly strange things. When I hear that their vehicles are underwater (i.e. they owe more than the vehicles are worth), I say “that’s great!” When they tell me that their house has plummeted in value due to foreclosures in the neighborhood, I start to smile. You see, being totally in debt is not only great for the economy, it is great if you want to file bankruptcy. Having an underwater car loan, strangely, will likely mean you can keep your car after the bankruptcy whereas having no loan on your car might render you without transportation post-bankruptcy.
We live in a world based on debt and that is why so much of this seems upside down. The fractional reserve banking system we have allows banks to create money out of thin air by lending out more money than they have on deposit. Banks literally turn $1 into $8. Magic! Hence, when banks start to lend, the economy starts to grow. As we have seen in the past, eventually consumers get so weighed down with debt that the whole thing bursts, banks cut back on lending, consumers either stop spending or file bankruptcy, and then we all wait patiently for the whole cycle to begin again.
As a bankruptcy attorney I have to wonder whether we are seeing these signs because so many people have rid themselves of debt over the last several years by filing bankruptcy. Elizabeth Warren once pointed out that the best people to lend to are those who have just filed bankruptcy. The reason is a creditor knows two things about them: (1) they have an appetite for debt having been in debt once before; and (2) they cannot file another bankruptcy for quite some time. From where I sit, that may just be what is happening.