Saturday, October 10, 2009

Personal finance woes and the subprime crisis

An excellent article in today's WSJ chronicles the struggles of a low-income worker with $36,000 in debt, $26,000 of which is student loan debt. The article also surveys the statistical picture we have of trends in debt among income groups before the subprime collapse, which seem like clear harbingers now.

When I was in Washington in 1999, I'd hear that similar concerns about the sustainability of debt among low-income households were apparently raised by President Clinton, who'd had a gut feeling about it. At the time, the statistics did not seem to suggest there was imminent danger. Indeed, the bursting of the Internet bubble in 2001 was not caused by nor did it destroy the finances of low-income households. This time, the story was clearly different.

An issue today is the "game theory" of debt for low-income folks. The article reports that the worker in question refuses to agree to debt relief (by paying off a large portion of the debt now in return for forgiveness) because of its long-term effect on her credit score. On the other side, credit card companies have been raising interest rates on balances because of the fear of rising default rates. But rising interest rates are a self-fulfilling prophecy of increased default.