Household Debt in America: Don Schlagenhauf's Presentation

Don Schlagenhauf, chief economist for the Center for Household Financial Stability at the St. Louis Fed, describes how household debt in America has changed across generations and over time. He considers changes in household debt-to-income ratios and in the amount and type of debt that consumers take on at different points in their lives including student loans, mortgages, unsecured (credit card) debt and auto loans. He also examines the impact of recent recessions on these categories of debt. The presentation includes a look at household income for all consumers and for minorities and how much earnings, income and net worth disparities have changed over the course of recent recessions. Schlagenhauf concludes with a discussion of how the Fed has responded to declines in household wealth and reduced spending.

Presentation (PDF)

• Part 1: Julie Stackhouse, Introduction and Welcoming Remarks (6:25)
• Part 2: Don Schlagenhauf, Presentation (1:05:31)
• Part 3: Audience Q&A (21:44)

Transcript:

Don Schlagenhauf: Thank you, Julie. So this is my first Dialogue with the Fed, and as Julie told you, I come from academia, and I'm used to teaching big sections. So—and this is titled, Dialogue With the Fed. So if you have questions, let's not wait until the end. Ask me. If we have points to clarify, we'll try to answer them. And I guess I've been told that you have to figure out how to turn your mic on, and-and do that. But if we have questions, let's do—yes, sir?

Male: Yes. How do you define a generation?

Don Schlagenhauf: I will do that, but I will tell you we'll do it by age cohorts. Say, we'll start with age 20, and go 20 to 30, 30 to 40, 40 to 50. Okay? So it's not the way a sociologist would do it, but I will show you some pictures, and make it clear why I want to talk about age cohorts and generations. Okay?

Don Schlagenhauf: All right, so now we've already got the tone. You're going to ask me questions. Maybe I'll call on you. I always like to call on the front row. Jean says, "Absolutely not." Okay, let's get to work. So I need my clicker though. So—and if you have a question, you don't have to worry about the last name. Just say, "Don." I will understand. All right, so this is work that Carlos, Brian Noeth, and I am working on, and it's a big research project. Okay, so what I want to start with, some background. So the first question we have is, how much have different generations of Americans borrowed, relative to their income? It's kind of a warm-up exercise. Okay? So first of all, I want to go back. We're talking about household debt. So if you're here to talk about the government debt, that was three years ago, when we had that topic. This is just about household debt tonight. So what I have here is a slide that says, one of the ways we measure indebtedness is we take the debt of a household. We divide it by your income, and we look at that ratio. So very simply, if you're making $10,000 and you have $2,000 in debt, your debt-income ratio is .2. Okay? That's all this is. But this is for the U.S. economy, now. So look at what's happened. In 1950, the debt-income ratio was about .3. And what do we see? It's been going up gradually. That's why I made it clear that we're not talking about government debt.

Don Schlagenhauf: But it's been rising, okay? Steadily. Let's see what's happened recently. That's what's happened recently. So what's happening, around 2000, we had a debt-income ratio over one. About 1.2. We had the great recession, and after the great recession, what happened? It came down under one. Okay? And that action, going from a peak of 1.2, or 120 on that axis, down to under one is what we—economists are going to call deleveraging. And we're going to talk about that tonight. Okay? So that's the first slide. If I add disposable income, what is that? Personal income doesn't deal with taxes. So if I take taxes out, what happens? I make that denominator smaller, debt stays the same, and the curve just slides up. Okay? That's all that says. I think we just need one there, but Carlos wants two, so we leave it in for Carlos.

Don Schlagenhauf: All right, now one question you might have is, the answer to what's going on is very simple. We've had low interest rates, and the Fed has had this low interest rate policy, and that explains it. But I want to show you, that doesn't explain it. So let's go back in time. Let's start in 1950. What's happened? If you look at the dash line, that's the 10 year treasury bill rate. If you look at the solid line, that's our debt-income ratio. So between 1950 and 1970, interest rates are going up, and what's happening to the debt-income ratio? It's going up. That doesn't fit the normal story that's low interest rates that are causing the debt output ratio to go up. Now, let's look at 70 to 90, because that's going to be important. Between 70 and 90, look at interest rates. They soared. I remember my first mortgage was right around then. It was in—when my daughter complains her mortgage rate is 3%, I go, why are you complaining? Mine was 13%. Well, what's happened here? Interest rates soared, and what happened to the debt output ratio? In general, went up again. Now, let's look at the last part. 1990-2010, what's happened to interest rates? They went down. What happened to debt output ratio? It went way up. So my point here is, if you look at the picture carefully, there's not a consistent story that the answer is simply interest rates, and we can go home. There's more to it.

Don Schlagenhauf: Okay, so the connection between these factors is not obvious. That's why I've tried to explain to you. Other things matter. Future interest rates matter in making debt decisions, as much as current interest rates. Expectations matter. If I go back to that slide, think about when I and some of you bought your first home. You bought it in high interest rates, because it was time to buy a house. It didn't matter. You hoped to refinance later. So the last, demographics play a role. The Baby Boom generation plays a role.

Don Schlagenhauf: Okay, now let's talk about how the great recession plays a role here. The great recession was very interesting, because it was different. And I'll talk more about this, later tonight. It was very different, because it's the first post-war U.S. recession in which deleveraging played a role. And I have a slide in a few minutes, where I'm going to look at the Volcker recession, if you remember back in the ‘80's. And I'm going to compare it to the great recession. The first three years of the Volcker recession looked a lot like the great recession. But after those three years, those two recessions differed. And I'm going to argue, and we're going to argue, deleveraging was a key role in why they're different. Why it's lasted longer. We have some evidence to support this. States with the largest declines in home values—I happened to move when home values were low in Florida. And that's smart, as an economist. Florida also had the lowest recovery rates. One of the lowest recovery rates. The other thing is, monetary policy may not be able to reach households that are deleveraging. Okay? They can't fine tune policy to fit the problem.

Don Schlagenhauf: Okay, so what's the purpose of today's talk? What do I hope to explain to you, and make sure you understand? First, we want to explain why households use debt. I've taught undergraduates, and they go, "Oh, my father told me household debt is bad." Debt does not have to be bad. Which are the most important forms of debt, over the life cycle? So the man earlier, asked me the question, what do you mean by cohorts? I'm just saying, at different points of your life—perhaps when you're young, some debt makes sense, and I'll explain why. Maybe when you're in your peak earning years, debt doesn't make sense. You ought to save it. So the point there says, borrowing may play a role—I'm sorry. Which are the most important features over the life cycle? We'll explain which ones. What role did borrowing play in the financial crisis? We'll try to answer that question tonight. And then fourth, what has been the response of the Fed, and we'll try to explain it. And then I'll conclude with some initiatives, new initiatives that are being put on board at the Saint Louis Fed, and explain why we're doing the things we're doing. So that's the talk. We got work to do, so let's go.

Don Schlagenhauf: First question I'm going to have is, I'm going to analyze everything through a life cycle framework. And immediately, when I use words like that, everyone says, "Oh my God, he's going to do theory." I'm not going to do theory. No math in this lecture. I'm going to do a picture, and if I can explain the picture well, you're going to say, that's common sense. I don't need to be an economist to know that. So let's start it. Why do households borrow, or save? Here's the picture. This is the idea. Let me explain it to you. On this axis, the horizontal axis, I have your age. Okay? On this axis here, I have dollars. So let me make up some numbers, so it's clear. Let's suppose it just happens that that's age 35, 40. Let's make it easy—40. If I go up to the black line, and I come over, what does that tell you? How much you're consuming. Now, what else do I need to know? If I know whether you're a borrower, or saver, I have to take that same age and go up to the income line, which is the one that's going up. That tells me what you make today. If I compare income, and I compare what you spend, what's the difference? You're saving. That's all it is. Okay?

Don Schlagenhauf: Come down here. You're 20-years-old, down there. What happens, when we all go back and think about when we started at our jobs, they didn't pay us very much. That's what this says. Income is very low. So I go up to the horizontal consumption line, which is consumption, to make things clear—you're consuming more than you're earning. What are you doing? You're borrowing. That's all this says. So at certain ages, the normal course of events tell me that when you're very young, there's an imbalance between income and spending. And when you're very young, it's not your peak income. You're a rookie. You're not being paid a lot. So what are you going to do? You may want to borrow. And that's natural. But at some point, at the crossing point, you're saving. You're saving. And the higher your income, and we'll talk about this in a second, the more you save. And why are you saving? Because you know, as a good fraction of you admitted, you're going to move into the retirement stage. And at the retirement stage, you're not saving. You're bringing savings down, and economists call that dissaving, negative saving. Okay? That's all the life cycle model tells you, and that's how we want to think about age, and generations, and that framework. Because at different parts of the lifecycle, you're going to use different types of debt. Okay? So if you have any questions, ask me. Anybody?

Male: Why is it self sustained?

Don Schlagenhauf: Great question, because I wanted to make it simple. The answer is, of course it's not—it could be a straight line that goes up, and with a trend, right? So I'll talk more about it. But it just made the diagram simple [unintelligible]. Okay? Yes, sir?

Male: What do you do if—when income crosses the consumption line at, like, age 25 or 30, and more of that happens at age 55?

Don Schlagenhauf: Well, I'm going to put some qualifications here. But if you're telling me, what happens if the consumption flat line is higher, right? It's clear that as a young person, you borrow more, right? It also means you have a limited time of saving. You do save, but clearly not as much as this diagram would insinuate. But what happens? You have less money to save, so now you have a problem in retirement. So the model's very simple, because you've moved these curves around. The way I've drawn it, your peak income level is before retirement, and I'll show you data that's realistic. But we'll look at this. One of the parts of the day's lecture is to show you what happens when the income curve changes, and debt changes. That's why I want to organize the lecture around this framework. That's all.

Don Schlagenhauf: But yeah, you can play with this. And you get insights as to what can happen. So there's a couple things I want to say right now, to make sure this is clear, and you don't misunderstand what I'm trying to tell you. First thing is, over an individual's life, there is obviously a natural mismatch of income and consumption that can result in borrowing. Okay? In other words, borrowing is not necessarily bad. Secondly, holding debt does not necessarily mean you have a financial problem. Okay? The third line is the kicker, okay? Household debt decisions, and this is how economists think, must be consistent with repayment over the life cycle. So as long as you take debt out, fine. But by the time you leave the earth, you have to have it paid off. Then there's nothing wrong with debt. It's the people who have taken out so much debt, they can't pay it off, and that's a problem. Then they're not financially sound. Yeah?

Don Schlagenhauf: So let's talk a little bit about what consumption is. So I've already said I've got it for just an illustration I've made a flat line. It could be curved. It could be bowed. But there's certain properties economists think about consumption. First of all, consumption depends on current income. However, it's not sufficient to depend on current income. It also depends on expected future income. So let me tell you an example that I've taken from Florida State University. Florida State University, I'm sure you all know it's in Northern Florida, just make a big square in your mind. And divide that square in half. On the left hand side of that square, my left hand side, that's where the academic community is. And there's parking lots for students and faculty. And I go to the right hand side of the square, and who lives in the right hand side of the square? The athletic programs, football players, you're right. Who else? That's the new medical school. So I was teaching this, and I said, "Can we think about consumption spending and expected future income?" And they go, "Oh yeah, I understand this concept. When I bike around the football parking lot, it's amazing. There's lots of BMW's. When I go to the medical school, what do I learn? Lots of BMW's. And then I come down to the students and faculty, lots of cars that are Fords, and Chryslers, Mazdas, very different." What's happening? These football players and future doctors are trying to smooth their consumption. Straight line. Why? Because they know they're going to be, likely, making a lot of income in three or four more years. So they borrow against that. That's called consumption smoothing, and stresses the idea that an important factor in how much you consume depends on your expected future income. That's the idea.

Don Schlagenhauf: Now, there's another part of that diagram, and I won't back up, that one could ask. That line, that consumption line, may not be fixed. We all know we get income shocks. Now I'm talking like an economist. What's an income shock? You come here tonight, and someone hits you. You have an automobile bill, right? That's going to affect your consumption. You have a medical shock, a medical bill. That's going to affect the plan, and going to affect your consumption and borrowing strategies. So that's another important factor. Or you lose your job. So I drew the slide to explain the life cycle model. It's very simple. I help you understand it. It's just a guide to help us think about problems. Now, I'm going to go to actual data, because I want to see what income looks like, okay? Because usually I tell people, your peak income is around 53. And they go, that wasn't me. I kept making income higher every year until I retired. But this is the average person, I'm plotting. Not you. And what we see is, we have this pattern of earnings. Be precise—earnings is different from income. Earnings is what you make by selling your labor skills. Or, if you're an entrepreneur, the reward you get for being an entrepreneur. That's what an economist means by earnings. Income looks very similar. So we see this pattern. Now, we have a fancy word for that pattern. It's called a hump. So economists believe that income has hump shaped patterns. Okay? At some point, you—the average person has a peak around 53, and then you slowly lose income until you retire. That's the average. There's exceptions to this, and we all want to be exceptions.

Don Schlagenhauf: So what do we get from this message, from this framework? There's a lifecycle motive to debt. Borrowing at young age can make sense. What are two examples? Student debt. You can borrow to get human capital skills, and then the reward that you earn, in terms of higher wage, you pay off that debt. Okay? That's the idea. Also, you may—when you're a little older, maybe in your ‘30s, decide you want a house. So what do you do there? You take out a mortgage. So those are two examples of types of debt that are likely to be relatively young in age for individuals to take out. There's another motive for debt. You want to maintain a stable consumption pattern. You don't want to make decisions where you eat a lot this month, and then you're surprised that you have no food next month. That won't make you happy. So you'd like to smooth your consumption over time, so you eat every month. Okay? There's a role for debt there. There's an insurance motive that influences debt. Suppose you have that bad health shock. It's in your interest to, what? Figure out strategies to not make you susceptible to health shocks. You're going to get a health shock. But how can you minimize, or mitigate, the damage? There's two ways. Take health insurance out, right? That minimizes the expenditures. There's a second way economists call it, and the name right here is called self-insurance. What does that mean? It means you save in anticipation of health shocks, and you don't buy insurance. You insure yourself against these bad things that could happen over your lifetime. Okay? So that's another example. And then lastly, we all want to buy, or purchase, big ticket items. These are expensive. Houses, refrigerators, and what we may take out is—use our credit cards to buy them, but then we pay them off over time. That can be a sensible way to use debt. As long as you can pay them off.

Don Schlagenhauf: So what are households doing with all this debt? So I want to break the lecture down, now, into pieces. I want to first talk about income, and then I want to talk about what's been going on with debt. Okay? And I'm going to probably have to call on a couple people, or ask for volunteers, because there's some patterns we're going to learn that are kind of interesting, and people haven't really picked up on them. So Carlos, and I, and Brian want to understand. And maybe you can help us understand.

Don Schlagenhauf: So first of all, before I hit income, let me look at some basic pictures. Okay? This is credit cards. Average unsecured debt translate is, what's happening to the credit card debt? Now, if you look over here, I have 1999. And some people say, "Can't you do anything more current than 1999?" Well, I am. I'm going to have slides of how this changed over 20 years. But I want to have a baseline, and this is pretty normal behavior. What do you see about credit card debt? In 1999, credit card debt peaked for 50-year-olds. Right around 50-year-olds, and the number was somewhere between $7,000 and $8,000. Okay? So you see, credit card debt had a hump, and more middle aged people took advantage of it. Okay?

Don Schlagenhauf: Let's look at mortgages, because this is going to be a key part of the story today. If you look at mortgages in 1999, what do you see? Look at this number. Peak mortgages occurred somewhere between 40 and 55. There's that flat period. But look at what the mortgage was? $50,000, which was the average mortgage—outstanding debt, okay? I was—you're going to be shocked. I think I was shocked. You're going to see how this has changed during the recession, the great recession. What about auto debt? Okay? That's another major category of debt. You see, again, a truncated hump. It's very flat, because we all have to buy cars every seven years, because they break down. But look at the amount of debt. It was about $4,000. Okay? These are just reference points, you're going to see this again. And then lastly, Brian tells me to warn you, this could be data that's something screwed up here. But it doesn't matter. I'll show you other pictures. In 1999, student debt was around $2,000. It's what you would expect. Around 29, 28, it peaks, and then you slowly bring it down. Okay? So that's our benchmark. Debt looks differently, depending on the type. All right. So let's summarize a bit. Borrowing in the life cycle. Some of these forms of borrowing happen at different ages over the lifecycle. Student debt is earlier. Mortgages are 30 to 50. Young individuals finance college. Newly formed households purchase homes, but that's usually 10 years after that student debt occurs. Middle aged households tend to use credit cards more frequently. And all households use auto financing. Okay? That's what those four pictures we can take away.

Don Schlagenhauf: Now, we want to start moving to what's going on more recently. Okay? So I want to start—as I told you, we're going to stop on debt for a few minutes. I want to talk about what's happening in income, because that's an important ingredient in understanding debt. Some terminology that I'll use, and try to stick with—I'm going to use the word, earnings. And again, earnings is what you earn from your labor. That's all that means. Income is different from earnings. So you have to be careful. It's earnings, plus capital income. What's capital income? That return you earn on your stocks and bonds. If you own rental property, that's included there. What else does it include? Government transfers, okay? Government transfers. Unemployment, insurance, things like that. And then lastly, we want to look at net worth, and see what that happens. Net worth is just the value of your assets, minus the value of your debt. So, part of the idea is we want to see how these three categories have changed since 1999. We want to ask the question, is all this discussion about the income distribution becoming more skewed accurate? We want to talk about—a little bit about minorities, and their income, and what's happened during the great recession and after, just to see and check the facts we hear in the media. That will give us a platform to understand income. Once we understand that, what will we do next? We'll go back, and look at these debt categories. Okay.

Don Schlagenhauf: So let's take a look at the income distribution. So let's see if I can successfully explain this simply. I didn't want to use fancy terms, so one way to judge what's happened with the income distribution is to take the median income, okay? What's the median income? It's the average guy income, right in the middle. And then what I want to do, and I just arbitrarily picked these. I want to take a poor person, and I want to see what their income was at the 20 percentile. So I take income from $10,000 to $300,000. I rate them, I stack them. I say, where is the 20 percentile guy, or group of people? And then I say, let's take the rich guy, and see where they are, and I'm going to pick the 95 percentile. Why 95? I don't know. It was my choice. But I want to show you something that's kind of eye awakening. I first want to look at the Volcker recession. I'm sure most of you have heard of that. That's the severe recession we had in 1980 to 1982. And then I want to look at what's going on with the great recession, and I want to look at what's going on.

Don Schlagenhauf: So let's start with the Volcker recession. Okay? So if you're at the 95th percentile, in 1997 that average income was $191,000, okay? If you're at the middle guy in 1997, you're at $72,000. And if you're poor, meaning you're in the 20th percentile, you're average income is $33,000. And these are all in common prices. So inflation's not playing a role in these figures. I want to look at what happened to income at these various percentages. So compared—'97 to '82. What do you see for the rich guys? Their income went down 1%. If you look at the median, the middle guy, what happened to their income? It fell 10% in that Volcker recession. And if you look at the poor guy, their income went down 20% in the Volcker recession. Okay? So this clearly indicates poor people tend to get really hurt in severe recessions. But what I want to do is, I want to stop—not go any further in that first part of the table, and I want to look at the recent recession, and I want to look at the years, 2007 to 2009, and I want to see what happens with the same percentiles.

Don Schlagenhauf: Look it, if you're at the 95 percentile in 2006, the average income is $290,000. It went up. That's not my problem today, though. If I look at what happened to that, the rich guy, 95 percentile in 2006 and 2009, what do I see? Their income over that three year period went down 4%. They got hurt. If I look at the median guy, that person's income went from $83,000 to $76,000 in the great recession. They lost 9%. And if I look at the poor person who had $33,600, it fell to $26,900. They lost 20%. We don't have to be statisticians. What's the message? The three years—the first three years of the Volcker recession, and the first three years of the great recession looked very similar, in terms of losses. Everyone lost. Who lost the most, were people at the lowest percentage of the income distribution. Okay? That's the first message.

Don Schlagenhauf: Now, the second message says, let's go three more years and see what happened. The Volcker recession in '80, '82, we compare 1982, three years later, 1985. What's the message here? Go to the very end, the black numbers. They're not in the red anymore. They're black. And what do we see? The 95th percentile in that Volcker recession went up 11%. The median guy went up 9%. And the poor person went up 11%. So three years after the recession, the next three years under the Volcker recession, income recovered nicely. Now, look at the great recession. If we look at the 95th percentile, and we look at the percentage change from average income at that percentile in 2009, in 2012, we see the rich guy still lost 3% more of their income, their earnings. Be careful. Their income, I'm sorry. What happened to the median income? Went down another 2%. And what happened to the poor person? Went down 7%. That's the big question. Why didn't income, over the entire income generation, recover like it did in '82, '85? Okay? And as we go along, we'll give you an explanation. It'll have to do with this idea of deleveraging. Okay? But there was clearly a difference. These recessions, in terms of their severity were quite similar in terms of output loss. But the wage recovery, the income recovery after the initial three years was quite different.

Don Schlagenhauf: All right, so now let's look closer at income. What's happened, so we have a good flavor of what's going on. So I've got, kind of, movies here. All right, I'm going to have a movie, a graphical movie. It won't pass Hollywood standards. And I'm going to have a movie of net worth. That's what I'm going to look at. Define what they are. So there's our hump shaped pattern in '92. We've seen it before. So let's take some data six years later, in '98. And what do we learn about income? We still have a hump shaped pattern. It went up, and where did it go up mostly? People over 46, and older. Look at what happened to wealth. Wealth went up, but clearly biased toward people over 46 again. But the bottom line is, in that six year period, what happened? Earnings went up. Net worth went up. Let's do another one. Let's look at 2007. We're getting close to the great recession. What do we see with earnings of families? What we see is, more growth in income, but where is it—where would you want to be? Well, if you're in the 51, 46, 56 age cohort, you did real well in 2007. Net worth shows you did well, because your stocks over your debt grew. You became wealthier. All right, let's move on to 2013, until after the great recession. First of all, look at what happened to earnings. Basically, if you look at this, we're about the same as we were with the blue line. What's the blue line? We're basically back, in terms of income by age, back in 1998, after the great recession. Look at what's happened to net worth. We're back at the blue line. We're back, in terms of net worth, and we've lost a lot, back at the '98 level. Now remember, these are averages. There are certain people at each age cohort that still did very well. Okay. So now, we understand basically during the great recession, we had a lot of earnings gains, and then we lost them. We lost them. We fell back almost a decade.

Don Schlagenhauf: There's been a lot of talk about what's happened with the income distribution. So this may not be—this is the easiest way, I think, to talk about the income distribution. So let me explain all it says. It's quite simple. I want to look at an individual's average income, if they're in the 30th percentile. That means they're below average. That's all that says. And I want to compare their income to someone who's in the middle, the median person. So that's what these three columns tell me. First thing it tells me is, look at what happens to earnings, okay? We're trying to find out if the income distribution has changed. If I look at earnings, what happens? Basically, the 3.6 number says, if you're in the middle, at the median, your income is 3.6 times higher than someone on average at the 30 percentile, okay? So between 92 and 2007, what's happened to that number? It's come down. How do I interpret that? There's narrowing. There's narrowing, okay? But look at what's happened since 2007. It's widening. It's widening. Okay? So this is a comparison of the lowest 30% with the median guy. But basically, we're still under the difference—or the factor, in 1992, okay?

Don Schlagenhauf: All right, if you look at income—this always puzzles people. It's flat. Why is that? Well, what does income include? Income includes various forms of income besides labor income. Stock markets. It also includes government transfers. What are government transfers? Unemployment insurance, right? So one argument is, if you look at the income measure, when you compare the 30 percentile with the median guy, it hasn't changed much. And the argument is, it hasn't changed much because transfer payments has been fairly effective at protecting the poor. They're not living with great incomes, but they're being protected. Look at net worth. Net worth tells a little bit different story. What is that? Return on stocks, minus debt. You see this factor has basically increased, so now net worth is about five times what it is for the middle guy, compared to someone in the 30th percentile. That has grown. But wait a minute. That's only half the story. The more exciting part of the income distribution story has to do with the 50-90 ratio. What's that? Let's look at someone in the 90th percentile, the average position, and compare it with the median guy—the middle guy. What do we see? In terms of earnings, we see something similar to what we saw for the 30-50 ratio, but now for the 50-90 ratio, it's pretty flat and then it grows a little bit. But maybe not as much as the median insinuates. Income? Income grows, because the transfer programs aren't important in the 90-50 dichotomy. If I look at net worth, here's the issue. Look at what's happened. If I compare the 90-50 ratio of net worth in '92, the 90 percentile had seven times as much net worth. If I compare it with 2013, it's about 12 times as much net worth. So in terms of net worth, we see some growing. And that's not surprising, given the amount the stock market has taken off in the last six, seven years. But this is one measure that you can address this yourself, and you can judge whether you think the income distribution has been unfair, and grown too much. But those are the facts. Just compare these percentiles with the middle, and you get a flavor of what's going on.

Don Schlagenhauf: One of the last income graphs. It concerns minorities, okay? So let's see what's happened. What I've done is, we've looked at an income profile for Hispanics, and we've done on the right, an income profile for African-Americans. And so what's happened? So the first thing I compare it, the black line is all households in 1990. The red line over here is what the income distribution looks like at various age cohorts for Hispanics, and what do we see? It's lower. It's lower. The peak for all is around, say, $80,000. For Hispanics, the peak was a little under $60,000. If we look for African-Americans, we have the same peak. The peak is a little earlier, but it's about $50,000. Essentially not much difference between Hispanics and African-Americans in 1990. Now, we're at the movies. See what happens. I'm not going to change the black line, so it's not really useful to compare it to that anymore. The green line says what happened in the year 2000. So what we see is a slight upward movement. We can debate whether it's really significant. For African-Americans, we see a big movement up. But about the same, in the ballpark for Hispanics and African-Americans. In 2010, what do we see? We basically see for Hispanics, no major change from 2000. For African-Americans, we see, actually, a drop in that income affect by age. And then if we look at the most recent data, which is 2014, what do we see? We see a little bit additional drop. We see another drop. The bottom line is, it's hard to say one minority group, ethnic group, has been affected more than another ethnic group. I think that's the bottom line.

Don Schlagenhauf: Okay. So that gives you an idea of income. The bottom line is, income grew, the great recession occurred, income fell. That's the story. So now let's start looking at debt categories, and see what we get. All right? So here's your credit card story. We have the hump. You've seen this for '99. In 2005, credit card debt went up a little bit, for all age groups. If we go to 2008, went up a little bit. Effectively the same as 2005. 2010, great recession is under way, it's coming down. It's coming down over all age cohorts. Deleveraging, we're going to say. And then if we do the most recent data, 2013, look at what happened. It's fallen a lot. So before the great recession in the blue line, we already said that the peak debt around middle age, 50, was $7,000. Look at what's happened after the great recession with credit card debt. It's down to $5,000 for peak. So there's been a really readjustment on how U.S. households use credit card and debt accumulation. Yes, sir?

Male: How much of that decrease is attributable to write-offs?

Don Schlagenhauf: Oh, I can't tell you exactly, but we're doing data trying to track this for individuals, now. We'll mention this later. You know, the bankruptcy rate and write-offs is still relatively small percentage. I mean, I can't give you a number and say, it's X. But it's probably a factor. I guess, I don't believe it's a major factor, but I don't have the data to support my position. Hold on guys.

Julie Stackhouse: If people could use their mics, so that people who are watching online can actually hear the questions, that would be great.

Don Schlagenhauf: Yes, sir?

Male: Is the difference drop there, due to people paying off their credit cards, or just not using them as much? Don Schlagenhauf: Well, it's clearly they have lower levels, so they have, in some way, reduced their debt. And they've probably, if they're going to maintain that 2000 level, they're maybe using it—we hope—more wisely. Okay. So they're still using credit cards, but they're not, probably, rotating it as much as they once did. Yes, sir?

Male: What about transferring that to secure debt?

Don Schlagenhauf: We're going to look at that. Okay? We'll look at that. If you're talking about bonds, and things like that, I don't have that data with me. So I may not totally make you happy with my answers. But let's look at mortgages, okay? We're going to argue eventually the bottom line's going to be—here's the culprit. Here's the culprit. In 1990, we already said, peak mortgage debt was around $50,000 in the U.S. We go to 2005, look at what's happened. Two things: There's been a slight shift to younger households in 2005. But look at the debt, now. It's $80,000. It's over $75,000. So between 2005 and 1999, there was a big increase in the amount of mortgage debt that people were undertaking. But it's not going to stop there. If I go to 2008, what do we have here? Mortgage debt now peaks over $100,000. I should probably mention what's going on here. How do we—what are we doing here? We're using Equifax data, so we're using individual data, and Brian what did you tell me? Twelve million people, we're looking at?

Brian Noeth: [Inaudible]

Don Schlagenhauf: Yeah. We're tracking individuals, 12 million, and seeing how they're behaving with respect to their debt. Now, great recession hits, look at what's happened. The blue line, may be hard to see, falls down. Look at 2013. At the peak, in 208, mortgage debt was, let's say, $110,000. Just give us a number. In 2013, average mortgage debt is somewhere between $75,000 and $80,000. So people have really deleveraged, in terms of mortgage debt. Deleverage means they've reduced their debt burdens. Okay? Let's look at auto debt. Because this is going to be another factor that's important to consider. Yes, sir?

Male: On mortgage debt?

Don Schlagenhauf: Yes?

Male: Is that primary mortgages, or does that include home equity lines of credit?

Don Schlagenhauf: I—Brian can help me there. I think—

Brian Noeth: Yeah, it includes any mortgage against your house. So it will include installment loans, first mortgages, and home equity lines of credit.

Male: Thank you.

Don Schlagenhauf: All right, let me move on. My time is slow right now. So with auto debt, look at what's happened. Between '99 and 2005, auto debts rise, went up quite a bit. We went for more auto debt, maybe more expensive cars. 2008, about the same. 2010, came down. 2013, went up a little bit. Completely different pattern than mortgages. Let's look at the last one I want to talk about. The one that's in the newspaper. Student debt. Student debt, we said, warning, there may be some data inconsistency with respect to this sample. 1999, student debt averaged $2,000. If I look in 2005, look at what's happened to student debt. It's went at a peak from $2,000 to $6,000. Let me go again. Look at 2008, what happens to student debt? Up to $8,000. Let me go again. 2010, it's $10,000. And let's go to the most recent data, $12,000. Student debt has been entirely different from the other three debt categories. We saw deleveraging in the first three debt categories, but for student debt, what do we see? It's continued to grow. Now, look it, I got to say one last thing on student debt. The media says, oh my goodness, we have all these students with $100,000 of student debt. That's very different than these numbers. Why? Well, if we cut—I'm doing averages. If we cut the sample for the people with the highest student debt numbers, the top 10%, some of those folks do have $100,000 student loans. I had a student at Florida State who was right at $80,000, and unfortunately, she didn't make the grade, and she left the program without a degree. A year later, where did I see her? In the sociology department, starting another masters degree, and getting over $100,000 of debt. She would be in that particular tale. These are the averages. Yes, sir?

Male: Aren't more people going to college, so back in 1999, less people were going to college, so less student debt was being incurred?

Don Schlagenhauf: Well, certainly we've expanded with places like the University of Phoenix. They're trying to get more students into their programs, so we've expanded enrollment, certainly. But there's a lot of different providers now than there maybe was 15 years ago. Okay? Yes, sir?

Brian Noeth: Yeah, actually, it goes both ways. That is just kind of the initial—so that's the average of everybody at age 25. And so, yes, a lot of it is more people are entering. But it's also people that are entering are taking on more debt. So it's a combination of both.

Don Schlagenhauf: Yes, sir?

Male: Is one of the common denominators for the first three debts, they are secured loans, where college debt is not, and backed by the federal government?

Don Schlagenhauf: Possibly, yes.

Male: I think that's why the college debt—

Don Schlagenhauf: Brian is our expert on student debt. You want to say something?

Brian Noeth: Yeah, so we're looking at the entire population, not just people with those loans. And according, you know, a portion of the rise could be, also—yeah, that those other forms of credit have kind of dried up, and it's pushing people into student loans, and there's a lot going on with the increase in student debt. And we've done some work on this.

Don Schlagenhauf: Yes? I can't see you, but yes, sir?

Male: Yes. Does the fact that the amount of grants has gone down during that same period of time reflect the increase in the loans?

Don Schlagenhauf: Possibly. Can you?

Brian Noeth: There's a lot going on, but programs actually went up a lot during that time. So you know, a lot of it is probably you have a lot more people going back to school. You have people not making repayment as quickly because of the poor market. And there's another one that's on the tip of my tongue that I forget. Oh yeah, tuition cost. And yeah, and state aid is a big one. That one's also going down. So yeah, there's kind of a lot going on with why. And actually, I think grant aid has actually gone up slightly in the wake of the recession.

Don Schlagenhauf: Okay, let me move on. So we have a couple slides. I may cut a couple out, because there's only a certain amount of time. But I want to show you patterns that occur with debt. And I want to focus, really, on mortgage debt because I'll show you a couple more slides, and you'll see that was a key part of the deleveraging problem. So what I've done is I've plotted mortgage debt in 1999, and I've done it by age cohorts. Okay? And the first thing you can see is there's a pattern there. What's the pattern? There seems to be a hump in mortgages, and not too surprisingly, it's at the age, 31 to 40, where most of us go for our first mortgage. Now, we can run this pattern again, and we look at 2005. And we've already seen the picture. Mortgage debt went up. You can see how much it's went up, especially for the 31 to 40 people. Quite substantially, it's went up. It's went up, it's went up all the way through here. And then we have the 66 and older group, and we're going to come back to these guys. If we look at the 2008 sample, here's our peak, but every year for all age cohorts, all age cohorts, even age cohorts over 66, mortgage debt has been going up. 2010, great recession has hit, and now we start to see, what's happened? For the youngest cohort, it's come down a little bit. For the 31 to 40, come down a little bit, almost even. But look at the older cohorts. They have more mortgage debt. So if we go to 2013, we can see for the first four age cohorts, the deleveraging occurring. But if we look at the 66 to 75 cohort, there was no deleveraging. This has never picked up on the media, but the question is, and we haven't an answer to this. So if you have any insights, we're pleased to hear it. What is going on with these cohorts? In the oldest cohorts, are people taking second homes, if they're wealthy enough? And another mortgage? Or are these cohorts funding the mortgages of their grandchildren, and their children? Okay? So if you have any anecdotal evidence, please, we'd be interested in hearing about it after the talk. Okay? Yes, sir?

Male: What about reverse mortgages [inaudible]?

Don Schlagenhauf: So their effective mortgage day went up a little bit, you're saying? I don't know. I don't know if reverse mortgages are quantitatively significant with 13 million people, you know? Even with these, it won't be 13 million at the 75 to 100. But I'm not sure. I'm not sure. Yes, sir?

Male: Doesn't disbursement occur, inflating the debt for older people, reflected back? These are people who are holding very expensive paper, that's several years old. So their relative debt is going to be higher. You bought a house in 2008, you spent a lot more money for it than you spent in 2010.

Don Schlagenhauf: Well, the numbers are inflation adjusted, so we're not there. You're saying—

Male: It's not inflation. It's market—

Don Schlagenhauf: You're saying they took out a mortgage, maybe back when homes were very expensive.

Male: [Unintelligible] house you could buy for $300,000 now was selling for $500,000 back then.

Don Schlagenhauf: Yeah, and well, you're just saying they couldn't deleverage? They're stuck for awhile?

Male: They're still in the early years of their mortgage.

Don Schlagenhauf: Yeah, that's another feasible, you know, explanation that should be pursued. The question is, is there a good explanation, or are older households financing other—you know, children's debt spending, and putting their own retirement in jeopardy. That's one thing we want to figure out what's going on.

Don Schlagenhauf: All right, I'm going to go through this quickly. Yes, ma'am?

Female: Just another thought, out in left field maybe, but home prices obviously ballooned extremely high. And there's sort of a thinking, oh this house is quote, "On sale." I'm going to buy it on sale, because it's going to be higher three years from now. So maybe it's a risk—here I'm saying—that they're willing to take at that age, thinking, well I'm going to sell this house in a few more years because I'm going to enjoy it. And it's going to move higher. It's already fallen back 20 or 30, or whatever percent in whatever market. And they're willing, at this point, to take that move, that risk.

Don Schlagenhauf: That's possible. That's possible. Yes, sir?

Male: What about a differential, based upon location in the country? If you took out the west coast, and you took out the east coast, would that have any changes, if you basically broke it down?

Don Schlagenhauf: I don't know. It's something we should look at. Yeah. These are good ideas. One more, and I got to get going. Male: Yeah, I just—I read an article in the Post-Dispatch, this Sunday. I think it was Sunday. And it was regarding what I think they called deficiency adjustments.

Don Schlagenhauf: Okay?

Male: I'm not sure. Where banks, they're going back and they're collecting on foreclosed debt. [Unintelligible 0:57:27], whatever. But that's—would that be with this?

Don Schlagenhauf: Well that, efficiency judgments—I know this in Florida—can push you into foreclosure. So that would be—these are people that are still holding—they're not in foreclosure. They're still holding active mortgage debt.

Male: [Unintelligible]

Don Schlagenhauf: So this slide is very simple. It just says, let's look at individuals who have auto debt and mortgage debt. So what you see is, you see this hump shaped pattern that we talked about. But the other thing we see is that even though we said auto debt is important, look how unimportant it is, relative to mortgage debt. Now, this slide says, let's look at these renters. Renters don't have mortgages. Now, these could also be people, I understand, who have paid off their mortgage. So these people have no mortgages. So one thing to look at is, look at the difference in axis. This axis goes up to $350,000. This one goes up to $35,000. So don't be fooled by the size of the towers. These are smaller than the previous slide. But we see that basically, now, auto debt is more important than unsecured debt. So is this the last one? Let me do that one, just to show you. If you look at the set of people, it's about 3% of the people in the Equifax sample, they have all debt. But what do you see? Gold dominates its mortgages. Student debt is up top, and even though we hear a lot of publicity about student debt, on average, it's important but it's nowhere near the mortgage debt story. All right, so let's now start trying to wrap things up. I'm getting over time, so I better quit soon.

Don Schlagenhauf: The great recession has brought sizeable changes in borrowing behavior. There's been a boom, and a bust in credit cards, mortgages, and auto loans. There's been significant deleveraging in these three debt categories. And then the other thing you should take away, the only exception is college debt, which has been increasing since 1999. All right, so let's look at household balance sheets in the great recession. Prior to 2005, interest rates and mortgage rates were low. House prices were increasing, and the economy was growing. Okay? Good times. Households had wealth, and could spend. Okay? Now, let's look at after 2005, and we'll put this story together. Go back to our Volcker slide, versus the great recession slide. After 2005, interest rates and mortgage rates were still low, but house prices were decreasing and growth was weakening. Household wealth declined. When household wealth declined, what happened? Consumption falls. When consumption falls, that creates more problem. The lack of spending, and there was no construction sector—Carlos has done research on this—with no construction activity, no growth in construction, what happened? The recession got magnified. So our argument is, what was different between the Volcker recession, and the great recession was this deflation—not deflation. Deleveraging. I'm sorry. Deleveraging. In other words, the difference was, we had a classic debt deflation cycle growing.

Don Schlagenhauf: So what has been the Fed's response? Okay? The Fed has a mission of being the lender of last resort, and it took that mission seriously. But providing liquidity, and keeping rates low, it provides a scenario for stable growth. But this was a challenging period. These are policies that traditionally followed, were effective in low inflation environments. But what happened during the great recession? The Fed had very little wiggle room, because interest rates were near zero. And once you're at near zero, you can't lower them beyond zero. That's the tantamount to saying, what? We'll pay you to borrow from us. That's not good business. Okay? So they came up with something called quantitative easing. So this is my opinion. I'm new to the Fed. Quantitative easing, when I explain to my students, is very simple. You can't touch the short term interest rate, and therefore, influence long. So what could you do? You can think of ways of moving the long term industry—interest rate, down. Why? If you can move the long term interest rate down, you can get investment going, and stimulate the economy. What else can it do?

Don Schlagenhauf: Get people back into mortgages, and get rid of this housing glut. So that's my simple view of quantitative easing. If you lived in the ‘60's and ‘70's, we call that, Operation Twist. Okay? But it's the same idea. There's obviously more to QE2 than Operation Twist, but that's a simple way to think about it. So last thing, and I'll wrap up. I'm late. I'm back to normal.

Don Schlagenhauf: Why is the Fed interested in micro data? What we're studying is micro data. We're trying to understand what's going on with individuals. What would motivate us to do that? The Fed is traditionally worried about what's happing to aggregates, like unemployment, inflation, income growth. And now there's a group of us here that are studying micro data. And I'll give you a very simple reason. One reason why we're doing it. Carlos and I wrote a paper about seven years ago, six years ago, something like that. And what we noticed was, those households who had a lot of aggressive mortgages, so they had no equity, were very susceptible to bad income shocks. Okay? They had no liquidity. No liquidity to weather a bad income shock, because of these mortgage. They had this growing mortgage payments. So the idea might be that if we can monitor household balance sheet data, and we can identify certain variables that are indicators of potential developments that can hit the economy, we want to model that, and we want to track that. And that's why we're looking at micro data. We're looking for new leading indicators that we never thought about during the last great recession. And where this is going is, certainly the research department is actively involved in this. And there's a new center where I'm housed, Brian's housed. It's called The Center for Household Financial Stability. And we're building household balance sheet data for individual households. And hopefully in the next six months, we'll have an announcement. We're hoping to get some data, can't say anything about it now. But we're going to create an index number, to try to track developments and household balance sheets, and see if we can't monitor potential problems.

Don Schlagenhauf: The other new initiative is econ-ed, which is trying to promote economic literacy for students and for consumers. And I'll leave this webpage up, this slide up, because if you're interested, you can check them out. They're well documented on the Fed's website. So I apologize. I went 10 minutes over, but we had some good audience participation. If you have questions, I'll stick around. But thank you very much for coming. Yes, sir?

Male: What about fiscal policy?

Don Schlagenhauf: What about fiscal policy?

Male: You said monetary policy, but it's the Fed's. What about fiscal policy?

Don Schlagenhauf: Well, I guess one reason—I can answer that a couple ways. One answer is—why don't the rest of you come up.

Julie Stackhouse: Yeah, just to be sure we're clear, what we are going to do now is reset some of the chairs, and Don's going to be joined by Carlos and Brian, and hopefully we'll be able to get at some of the specific questions you have, where they can bring some of the answers. So we'll let them just come up.

Don Schlagenhauf: So I think the answer to your question about fiscal policy has a real role. But we know fiscal policy, in the last eight years, has not been useful to them.

Male: I've got to ask you. Are you giving input to Congress, to changing fiscal policy? That's the thing.

Don Schlagenhauf: Well, our focus now is monetary policy at the Fed.