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					By Neil Irwin
Washington Post Staff Writer
Tuesday, February 15, 2011; 7:16 PM

The recession that just rocked the U.S. economy happened in part because Americans were
borrowing and spending more than they could afford. Now, three years after the downturn began,
families are moving faster than many analysts had expected to put their finances in order by
paying down debt and boosting their savings.

That bodes well for the recovery. Once Americans get their savings to a comfortable level, they
can increase their spending all over again - but this time without necessarily going into hock -
and give the economy a badly needed lift.

Compared with the summer of 2008, when consumer debt peaked, Americans now have 7
percent less mortgage debt, 12 percent less in auto loans and 15 percent less credit card debt,
according to the Federal Reserve Bank of New York. Loan payments last year were at their
lowest level in a decade.

Meanwhile, Americans are saving at nearly triple the rate they did between 2007 and 2009,
setting aside 5.3 percent of their disposable income in December, according to the Commerce
Department.

It's not just that people are becoming more frugal. Indebtedness has decreased in part because
banks are less inclined to extend loans and have written off billions of dollars in loans that went
bad.

But a range of government and private data show that ordinary Americans, such as Brenda
Marshall of Clinton, are playing a large role in improving the economic picture.

"I never would have thought I would be able to get my credit card bills under control, and I'm
really proud that I've been able to do it," said Marshall, 52. She has paid about $5,000 in credit
card debt over the past year and expects to retire the remaining $3,000 by April.

"The biggest thrill is when you get your statement every month and see that the balance has gone
down," she said.

Marshall has reduced her debt by cutting back on clothing purchases, restaurant meals and other
splurges, illustrating one of the key reasons the U.S. economy has been growing so slowly since
the recession officially ended more than 18 months ago. Americans have been trying to rebuild
their finances after becoming overextended during the boom years, putting a brake on spending
now.
Economists at the Federal Reserve Bank of San Francisco who studied the years leading up to
the recession found that U.S. counties where people took on the least debt relative to their
income are in much better economic shape than those with the highest debt burden.

A major question now is how much longer Americans will continue to pare their debt and rebuild
their savings. The answer depends on where debt loads and savings rates will ultimately settle.

By some measures, it looks as though there's still a long way to go. The amount of debt relative
to the overall size of the economy remains very high by historical standards. And the personal
savings rate remains well below the average of 7 percent for the past 50 years.

But analysts who study personal finances say that savings rates and debt ratios are not going to
return to their 1980s levels. So the adjustment shouldn't take much longer.

"How far along are we in readjusting household balance sheets?" said Mark Greene, chief
executive of Fair Isaac, the company that produces FICO credit scores. "We are clearly well
along the way, and I think we're probably at about the halfway point. We may have another year
or so to go."

Three factors have been contributing to falling levels of consumer debt, not all equally
encouraging.

People are choosing to pay down bills. And when consumers pay off credit cards, auto loans or
mortgage debt, it benefits the economy because they will have more to spend in the future.

The lower debt levels reflect tight lending standards. Some people might want to borrow but
can't get credit. Once banks feel more comfortable giving loans, the economy might get a boost.
But there's a risk that people are again taking out loans they can't afford.

Finally, banks and other lenders have been writing down loans as unlikely to be repaid. That
does the economy no good because people who couldn't make mortgage or credit card payments
are unlikely to drive economic activity.

Researchers at the Federal Reserve Bank of New York examined whether consumers are
reducing their debt or just defaulting.

"That's the question we wanted to address. And we're satisfied that through 2009 there's evidence
they were doing more than just defaulting, but in fact, paying down both mortgage and other
obligations," said Andrew Haughwout, an economist at the New York Fed.

In other words, there are plenty of Americans like Annette Zimmer of Arlington. She and her
husband finished paying off a five-figure credit card debt late last year. They are now able to
boost their savings. But they also have more money to spend than they did when they were
chipping away at credit card bills, allowing them to take a couple of ski trips this winter, for
example.
"A few years ago, people tended to live off credit cards," Zimmer said. "That just doesn't seem
sensible anymore."

As lenders become more willing to lend and the Great Recession fades into memory, will
Americans remember the lessons they learned about the risks of climbing debt?

On Tuesday, the Commerce Department announced that retail sales inched up 0.3 percent in
January for the seventh straight month.

The amount of revolving consumer debt - primarily on credit cards - fell for 26 straight months,
according to Federal Reserve data, most months by billions of dollars.

In December, it rose for the first time since September 2008, increasing $2.3 billion.

				
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