Discovery Guides Areas


Forgive Us Our Trespasses?
The Rise of Consumer Debt in Modern America

(Released February 2009)

  by Matthew Ruben  


Key Citations

Visual Resources

News & Scholars


Conclusions & Policy Solutions


The economic crisis has "solved" a couple of problems in the credit market (while assuredly creating other problems). For one thing, loans are no longer so readily being offered to consumers who are likely unable to pay them off. For another, the increase in consumer debt levels, both for mortgages and for other assets, has finally slowed.

But there exist some greater long-term implications. The economy would be paralyzed were the credit market to disappear and consumer spending to further dwindle. A recovery requires some jump in demand. But at the same time, Americans need to be able to start saving again, and a healthy credit market would be a positive investment. For scholars who advocate keeping consumer debt low, there are three general categories of prescriptions for a better future.


A common refrain asks for improved measures for outreach, counseling, and education on behalf of consumers and low-income families in particular. Schools and faith-based organizations, employers and public service providers have some responsibility to better educate the public - especially low-income families - about lending practices before they go into greater debt. If people learn how to better manage their finances and understand loan options there could be a significant public benefit.

chart correlating consumption and mortgage equity withdrawals
Consumption and GDP data from the Bureau of Economic Analysis (BEA). Mortgage equity withdrawals are measured as the year-over-year change in mortgage debt (from the Federal Reserve Flow of Funds) minus 70 percent of residential investment spending (from the BEA)

chart of credit card debt and carryover
Charts showing trend in amount of credit card debt outstanding, average interest rates and carryover balances.

Consumer advocates insist that too few underwriting standards exist for issuing loans. Regulatory standards have generally been lax in this country, and advocates resoundingly are calling for smart reform. The matter of credit card reform has been actively debated in Congress in the past couple of years. Given the current worries over financial markets, the issue is likely to be addressed in the near future. Indeed, President Barack Obama has proclaimed that the financial system has "failed the test of the marketplace."

Another sign that the winds of change are blowing comes with the release of the Group of Thirty's "Financial Reform: A Framework for Financial Stability." The document, whose authors include Paul Volcker, an economic adviser to President Obama, emphasizes the need to re-regulate global finance (Fitzgerald) and advocates for increased oversight and greater transparency in financial markets. The document also urges regulators to curb reckless lending by forcing banks to retain a larger portion of credit risk when loans are packaged into securities. (Financial Reform)

Future changes in the regulatory structure would in all likelihood force financial institutions to take more responsibility for their own credit risk instead of allowing them to repackage risky debt into securities. But these concerns would be weighed against the need, both for individuals and for the greater economy, to provide consumers some ability to borrow. Overregulation is still undesirable because in the absence of legitimate consumer access to credit services, business conditions will falter. Furthermore, credit card lenders, payday loans and mortgage brokers should operate in a healthy environment that would allow consumers access to a wide array of services whereby penalties and fees would be made clear to the borrower.

Some proposed regulatory standards are: (1) restrict industry-wide credit card lending standards so that criteria such as income and credit history play a role in lending decisions; (2) limit the number of payday lending advances a borrower can have outstanding at one time; (3) put maximum limits on interest rates, fees, and penalty charges; (4) address the securitization of debt which allowed mortgage backed securities to crash; (5) put special restrictions on terms for student aid. (Federal Trade Commission 26; Mantel 209; Wheary and Draut 8; Financial Reform 14)

options for fixing banking system
Graphic summarizes the options Treasury Secretary Timothy Geithner has to fix the ailing U.S. banking system.

Most consumer advocates agree that many consumer debt problems can be solved by an otherwise healthy economy. If income levels rise, and jobs and affordable health care are made available, overall levels of consumer debt should respond accordingly. The key to a better system of credit is the pursuit of more accountability at all levels - from governance and social responsibility in business to consumer advocacy and education efforts. The end result could be improved consumer welfare as well as a better outlook for the economic well being of the country as a whole.

© 2009, ProQuest LLC. All rights reserved.

List of Visuals


  1. Ausubel, Lawrence M. "The Failure of Competition in the Credit Card Market," American Economic Review. March 1991. 81 (1), 50-81.

  2. Beitel, Karl. "The Subprime Debacle," Monthly Review. May 2008. 60, 27-44.

  3. Bernard, Tara Siegel and Jenny Anderson. "Downturn Drags More Consumers Into Bankruptcy," New York Times. November 16, 2008.

  4. Callahan, Shannon and Ed Mierzwinski, "Preying on Portlanders: Payday Lending in the City of Portland," Oregon Student Public Interest Research Group. November 2005.

  5. Clemmitt, Marcia. "Regulating Credit Cards: Are Tougher Restrictions Needed to Protect Consumers?" CQ Researcher. October 10, 2008. 18 (35), 817-840.

  6. "College on Credit," Economist. January 10, 2009. 390 (8613), 30-31.

  7. Crawford, Malik, and Sanjeev Katz, eds., CPI Detailed Report. (U.S. Department of Labor, Bureau of Labor Statistics, Washington D.C.), November 2008 []

  8. Dash, Eric. "Credit Card Companies Willing to Deal Over Debt," New York Times. January 3, 2009.

  9. Doty, Michelle M., Sara R. Collins, Sheila D. Rustgi, and Jennifer L. Kriss. "Seeing Red: The Growing Burden of Medical Bills and Debt Faced by U.S. Families," The Commonwealth Fund. August 2008. 42, publication 1164.

  10. Draut, Tamara. "Debt: The New Safety Net," The American Prospect. May 2007. 18 (5), A25-A26.

  11. "The End of the Affair," Economist. November 22, 2008. 389 (8613), 39-40.

  12. Erasmus, Alet C., and Kethuswegape Lebani. "Store Cards: Is It a Matter of Convenience or is the Facility Used to Sustain Lavish Consumption?" International Journal of Consumer Studies. May 2008 32, 211-221.

  13. Families USA. Too Great a Burden: America's Families at Risk. December 2007. Publication #07-113.

  14. Federal Trade Commission, Prepared Statement of the Federal Trade Commission on Consumer Protection in Financial Services: Subprime Lending and Other Financial Activities before the House Committee on Appropriations Subcommittee on Financial Services and General Government, Washington D.C. February 28, 2008. []

  15. Federal Reserve Board, Flow of Funds Accounts of the United States: Flows and Outstandings Third Quarter 2008 (Board of Governors of the Federal Reserve System, Washington D.C.), December 11, 2008.

  16. "Financial Reform: A Framework for Financial Stability," Group of Thirty 2009. []

  17. Fitzgerald, Alison. "Group Led by Volcker Urges More Oversight of Banks," Bloomberg 2009.

  18. Garcia, Jose. "Borrowing to Make Ends Meet: The Rapid Growth of Credit Card Debt in America," Demos 2007.

  19. Garcia, Jose. "The New Squeeze: How a Perfect Storm of Bad Mortgages and Credit Card Debt Could Paralyze the Recovery," Demos 2008.

  20. Lea, Stephen E. G., Paul Webley and Catherine M. Walker. "Psychological Factors in Consumer Debt: Money Management, Economic Socialization and Credit Use," Journal of Economic Psychology 1995 16 (4), 681-701.

  21. Logemann, Jan. "Different Paths to Mass Consumption: Consumer Credit in the United States and West Germany during the 1950s and '60s" Journal of Social History Spring 2008. 41 (3), 525-559.

  22. Lopes, Paula. "Credit Card Debt and Default over the Life Cycle," Journal of Money, Credit and Banking June 2008. 40 (4), 769-790.

  23. Mantel, Barbara. "Consumer Debt" CQ Researcher March 2, 2007. 17 (9), 193-216.

  24. Mian, Atif and Amir Sufi. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," Initiative on Global Markets, University of Chicago Graduate School of Business May 2008. Working paper no. 15.

  25. Morgensen, Gretchen. "Given a Shovel, Americans Dig Deeper Into Debt," New York Times July 20, 2008.

  26. Peterson, Janice. "The Policy Relevance of Institutional Economics," Journal of Economic Issues March 2001. 35 (1), 173-184.

  27. Pew Research Center. "Inside the Middle Class: Bad Times Hit the Good Life," Pew Research Center April 9, 2008.

  28. Saulnier, Christine. "Payday Loans: A Financial Product with Broader Implications for Vulnerable Consumers," Canadian Centre for Policy Alternatives January 10, 2008.

  29. Scott, Robert H., III. "Credit Card Use and Abuse: A Veblenian Analysis," Journal of Economic Issues June 2007. 41 (2), 567-574.

  30. Soman, Dilip and Amar Cheema. "The Effect of Credit on Spending Decisions: The Role of Credit Limit and Credibility," Marketing Science. Winter 2002. 21 (1), 32-53.

  31. Silver-Greenberg, Jessica. "The Next Meltdown: Credit-Card Debt," BusinessWeek October 9, 2008.

  32. Stegman, Michael A. Winter "Payday Lending" Journal of Economic Perspectives 2007. 21 (1), 169-190.

  33. Stegman, Michael A. and Robert Faris. "Welfare, Work and Banking: The Use of Consumer Credit by Current and Former TANF Recipients in Charlotte, North Carolina" Journal of Urban Affairs 2005. 27 (4), 379-402.

  34. Stegman, Michael A. and Robert Faris. "Payday Lending: A Business Model that Encourages Chronic Borrowing" Economic Development Quarterly February 2008. 17 (1), 8-32.

  35. Swarthout, Luke. Student Debt and Consumer Costs in the Minneapolis-St. Paul Area U.S. PIRG Education Fund, July 2006.

  36. Weller, Christian E. "Need or Want: What Explains the Run-up in Consumer Debt?" Journal of Economic Issues June 2007. 41 (2), 583-591.

  37. Weller, Christian and Derek Douglas. "One Nation under Debt," January-February 2007. Challenge 50 (1), 54-75.

  38. Wheary, Jennifer and Tamara Draut. "Who Pays? The Winners and Losers of Credit Card Deregulation," Demos August 2007.