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The Big Dig: Fed Data Shows Households Attack Mountain of Debt

The long slog continues. The feature of the post-crisis economy has been a two-speed recovery. As a group, companies have done extremely well. Corporate profits and cash holdings are at record highs. The stock market has bounced back smartly since the lows of March 2009. But consumers haven't done quite as well.

There are several reasons for the dichotomy. Corporations increasingly operate in the global economy, which means their fortunes aren't tied to weak demand in the U.S. Consumers have been plagued by a weak job market and a horrific housing market. The difference in the ability of the two sectors to restructure (or shuck) debt and other financial obligations rapidly also plays a role.

When a crisis comes, companies quickly and coldly cut costs by idling factories and laying people off. Those who find their debts too overwhelming seek the protection of bankruptcy court. Once they file for Chapter 11 protection, huge companies like General Motors, or American Airlines, or Border's, can rip up contracts, get rid of onerous leases, and ask bondholders and lenders to accept stock or reduced payments in exchange for the loans they've made. It's a wholesale business. In a matter of weeks, tens or hundreds of millions of dollars in debt can be wiped out.

For consumers, it takes a lot longer to restructure debt. Families can't fire their kids, or walk away from financial commitments so easily. For most families, the biggest fixed cost is generally housing. And while it's possible to cut housing costs by defaulting, or refinancing, or downsizing, people still have to live somewhere. And in contrast to the system for processing corporate failure, the systems for processing foreclosure and personal bankruptcy move much more slowly. Personal debt restructuring is a retail business — done in increments of a few thousand, or tens of thousands of dollars.

But here's the thing. Through the post-crisis period, American consumers and individuals have made — and are continuing to make — serious, sometimes heroic efforts to save, stay current on financial obligations, and pay down and restructure debt. The process of digging out is going slowly, but its happening. Or at least that's the conclusion I drew from looking at the big report on credit released by the Federal Reserve Bank of New York yesterday. (The report is here, in PDF, and the data can be seen here by clicking on the Excel file on the right of this page.)

The headline number is a little messy, because the New York Fed only started including student loans in the data this year. Excluding students loans, total consumer debt stood at $10.791 trillion in the third quarter — the 12th straight quarter of decline. Consumer debt is off 10.5 percent from the peak of $12.06 trillion in the third quarter of 2008, and stands at its lowest level since the fourth quarter of 2006. In the most recent quarter, mortgage balances alone fell $114 billion, or 1.3 percent.

As we've discussed in other contexts, a big chunk of the decline in consumer credit is due to defaults and write-offs. But the Fed's data shows that, combined with some pay down activity, the rash of foreclosures and defaults has lead to some significant changes over time. Compared to the second quarter of 2008, there were 10.2 million fewer mortgages open in the third quarter of 2011. The number of credit card accounts open fell from 492.19 million in the third quarter of 2008 to 383.27 million in the third quarter, a decline of 22 percent. "Balances on those cards were nearly 20% below their 2008Q4 high," the New York Fed notes.

There are also signs in the data that American consumers have been doing a better job keeping up with their financial obligations. In the third quarter, the delinquency rate on all U.S. household debt rose a bit, to 10 percent from 9.8 percent on June 30. That's bad news. But look through the numbers (on page eight of the data file) and you'll see a slow improvement. Since bottoming in the fourth quarter of 2009 at 88.02 percent, the proportion of debt balances on which borrowers are current has been trending up -- not dramatically, but up nonetheless.

In addition, other metrics testify to an American consumer that is slowly digging out. The New York Fed reported that the number of people who "had a foreclosure notation added to their credit reports" in the third quarter fell 7 percent from the second quarter. It's hard to make too much of that, given the widespread dysfunction in the mortgage industry. But personal bankruptcy filings fell 18.8 percent from the third quarter of 2010. At 423,340 in the third quarter of 2011, it was the lowest quarterly total since the fourth quarter of 2008. Through the first three quarters, bankruptcy filings are off 17 percent from the first three quarters of 2010.

And so the slow-motion process continues. Instead of dramatic, rapid improvement in household balance sheets, we get slow, barely detectable ones. The numbers show a high level of stress, a fragile recovery, and plenty of pain to come for borrowers and lenders. But they also show that, over time, the excesses that built up in the last decade are slowly being worked out.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

His most recent book is Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.