Ending the Balance Sheet Recession Is a Big Task

I mentioned yesterday that I think we're in a balance sheet recession. Further credence, besides that post and the materials linked to in it, comes from the fact that total consumer credit fell during the Great Recession for the first time in the span that such data has been collected:

This graph from the St. Louis Federal Reserve shows consumer credit outstanding. The red line is revolving credit, which includes things like credit cards that are expected to be paid off monthly. The green line is non-revolving credit, which includes debt with specific time periods and payment plans like auto loans (but doesn't include mortgages). The blue line is the two put together.

The blue line only falls twice: very slightly after the savings and loan crisis and then quite a bit during the Great Recession. Non-revolving credit largely only stalled for a bit, while revolving credit plunged. Americans have been working hard at paying down their credit card debt.

The task of ending the balance sheet recession is incredibly big. Here's an idea of the scale.

The website LendingClub.com is a peer-to-peer finance service. People apply to get loans from the site, and it chooses whether or not to approve the loans and what terms to issue loans at. The loans are then funded by users, rather than the site itself. About two-thirds of the borrowers use the money to pay off credit card debt, usually consolidating it into a single loan with a lower interest rate than what credit cards charge. For them it's a way to transform revolving debt into non-revolving debt, which always carries a lower interest rate.

As far as I see it, arrangements like these are great. People with excess cash can make far better returns on it than the interest that savings accounts and CDs pay, while people with high interest debt can lower their rates. Of course there are risks for investors greater than the risks associated with deposit accounts; there has to be for it to pay out higher returns. Still though, both sides of the transaction benefit greatly. The intermediary in the form of the website itself charges lower fees than banks do for similar services because it's just a website. It has no branches or ATMs to maintain. It's a win-win-win for regular people.

As great a deal as this is, and it is growing rapidly, it has lent out just short of $500 million. Using the stats provided at the time of writing, $331.6 million of that went to helping people pay down credit cards. That's a heck of a lot of money. It's also a mere drop in the bucket.

According to the Fed data, the peak of US revolving consumer debt was $972.2 billion in September of 2008. It fell to $798.3 billion in November of 2011, the most recent data point at time of writing. That's a drop of $173.9 billion. As great a deal as Lending Club is, it has contributed towards less than 0.2% of the fall in credit card debt. Its data goes back into 2007 when it started, so not all of that $331.6 million has gone toward people deleveraging since the financial crisis began.

Credit card debt is only a part of the story anyway. Mortgages are still on top, and until housing prices quit falling, there won't be much demand for newly built houses. That's doubly important because construction jobs weigh heavily in the current unemployment mess. Plus, student loans passed up credit cards for the No. 2 spot on the US debt charts.

Lending Club is an ingenious way to help people get out of credit card debt, but it barely registers on the overall scale of the problem. Credit cards themselves take a back seat to mortgages and student loans now in terms of total debt outstanding. As long as Congress is going to hold up progress towards debt relief and real effective jobs programs, it's going to take a lot of ingenious ideas to dig the economy out of the ditch its currently in.