Page 44 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

figure would still lead to a reduction in consumer demand of up
to $600 billion per year over several years. On top of all this,
there is the impact of higher unemployment and the declining
values of assets such as houses, stock holdings, and pensions—
all of which are hard to quantify.
How can the real debt burden of consumers be reduced?
There are at least five options:

1. Continuously paying down debt. Consumers bite the bullet,
reduce consumption, and save money in order to pay down
loans. This kind of organic reversion to normalized debt
levels would be a time-consuming and painful process. It
would take many years, if not decades, and it would create
a long-term drag on growth in the real economy.
2. Selling assets to pay back debt. A broad liquidation of assets
would reduce debt levels—either by paying off debt or
writing it down—but it would also reduce the value of
assets further. This likely would lead to a domino effect
of bankruptcies and insolvencies of both private compa-
nies and households. The downward spiral in both the
financial and nonfinancial sectors would be exacerbated
and cause further asset value depreciation, which, in turn,
would increase the need for further deleveraging. And
with many households being net borrowers, this solution
could not be applied universally.
3. Defaulting. In the United States, residential mortgages
account for 74 percent of household debt and are mainly
nonrecourse loans. Many consumers might choose simply
to hand back their houses to their creditors and, in effect,
default on their loans. This so-called jingle mail (repre-
senting the sound of the returned keys falling through the

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