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Americans Get Smarter About Debt

Nobody considers the American consumer a model of financial probity. Perhaps it's time to reconsider.

One consequence of the 2008 financial meltdown and subsequent retrenchment of the whole banking industry has been a dramatic change in the way Americans borrow to finance their lifestyles. Total consumer borrowing exploded from $4.6 trillion in 1999 to $12.7 trillion in 2008, a 176 percent increase. Since then, consumer debt has fallen by $1.4 trillion, an 11 percent decline.

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The question is why. It's clear that part of the private sector's debt reduction has come from defaults on mortgages, credit-card balances and other types of loans.

But there are two other important factors: Banks have sharply reduced the availability of credit, for one thing. And it's always possible that Americans have become more prudent about living large on borrowed money.

Skeptics have attributed most of the change to banks forcing better habits onto consumers. But now there's new evidence that Americans are also forcing better borrowing habits onto themselves. A recent study by the Federal Reserve Bank of New York found that between 2008 and 2010, for example, the typical household flipped from borrowing money to repaying it. "Holding aside defaults," the authors wrote, "consumers reduced their debt at a pace not seen over the last ten years."

During those three years, the amount of money flowing to consumers from various types of loans plunged by about $500 billion. It's harder to quantify how much of that came from lenders' cutbacks and how much came from thriftier consumers. But there are several signs that consumers are better policing their own credit.

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One of the biggest consumer-led changes is declining use of credit cards. Starting in 2008, for example, there was a spike in credit-card account closings along with a decline in new account applications. Surveys show that some of that came from banks, but consumers themselves also cut back.

"While tightened lending standards have played a major role in the declining liabilities of the household sector," the Fed study says, "consumer-initiated reductions in debt have contributed as well."

Meanwhile, it's also clear that many Americans would borrow more if they could. That's especially true with regard to mortgages, which are still hard to get for anybody without a top credit score. Banks have been easing up, but only slowly, which may be one reason the housing market still hasn't fully recovered, nearly seven years after the housing bust began. Car loans have been easier to get, with a notable return of subprime lending, which is helping boost auto sales.

Debt is both good and bad. Too much of it produces the types of financial bubbles that led to the 2008 meltdown, but not enough of it leaves the economy starved of capital and stuck in neutral. Many analysts think the U.S. private sector is midway through the necessary process of "deleveraging," or paying down debt, which is essential for the economy to get fully healthy.

The Federal Reserve has had a big role in that, since its low-interest rate policy has allowed consumers to take on new debt with much lower monthly payments.

[READ: 4 Things Propping Up the Slowing Economy]

One exception to the trend is the federal government, which still hasn't begun to pay down its own mammoth debt load. Recent measures, such as tax hikes and spending cuts, might reduce the future growth of the national debt, but Washington is still running large deficits that are pushing the debt up, not down. Managing your money might turn out to be one more way that ordinary Americans have something to teach Uncle Sam.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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