In March, consumers had a record $957 billion of credit-card and other types of revolving debt outstanding -- up about 8 percent from a year earlier, according to preliminary data from the Federal Reserve.
That number is a bad enough economic indicator all by itself, a clear sign that in the absence of access to cash via home equity refinancing, Americans have been reduced to pulling out the plastic. But Adam Levitin, a law professor and credit expert at Georgetown University, explains at Credit Slips how the total figures for American credit card debt could be much, much worse, right now, had it not been for the mortgage bubble.
Levitin suggests that the refinancing boom of the last decade wasn't just so Americans could drawn down on the home equity ATM to buy a boat or a vacation in Puerto Vallarta. They were also refinancing their credit card debt:
Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch -- pay off your 22 percent credit card debt with a 9 percent mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).
But it's only a no-brainer until you can't pay that 9 percent mortgage. Default on your credit card debt and your credit gets busted. Default on your mortgage, and you lose your house.
So all those Americans who thought they were doing the smart thing by paying down their ballooning credit card debt may have ultimately made themselves even more vulnerable to an economic downturn by putting their homes at risk. And the nation, as a whole, merely postponed that inevitable reckoning with its addiction to a culture of debt.