PhotoU.S. consumers’ total debt crossed the $14 trillion mark in the third quarter to a record high, according to the latest report from the Center for Microeconomic Data, part of the Federal Reserve Bank of New York.

The debt includes mortgages, credit cards, student loans, personal loans, auto loans, and all other forms of consumer debt. The total has been rising for 21 straight quarters and has now surpassed the previous high reached in the third quarter of 2008, just as the financial crisis hit.

On one hand, the record borrowing shows consumer confidence. They are more willing to take on debt to finance new spending. Most likely a strong economy and near record-low unemployment is a contributing factor.

On the other hand, a mountain of debt can be a significant risk, as it was in 2008 when the global financial system nearly collapsed overnight and unemployment shot up to 10 percent. That economic catastrophe led to a wave of bank failures, bankruptcies, and home foreclosures.

Mortgages account for most of the debt

Most of the debt is in the form of mortgages. For the overwhelming majority of homeowners, those loans have fairly low fixed interest rates. Also, the payments are often comparable to or lower than what consumers would pay to rent a home.

More concerning, perhaps, is the 1.4 percent increase in student loans, which now total $1.5 trillion. Credit card balances are also more than $1 trillion, rising $13 billion in the third quarter.

While these are all big numbers, Federal Reserve Board Chairman Jerome Powell said Wednesday in testimony before Congress that it’s all relative.

"The ratio of household borrowing to income is low relative to its pre-crisis level and has been gradually declining in recent years," said in testimony before the Congressional Joint Economic Committee.

Low rates

A low-interest rate environment has no doubt encouraged increases in consumer debt, particularly credit card debt. Donghoon Lee, a research officer at the New York Fed, says the Fed’s data confirms that.

“New credit extensions were strong in the third quarter of 2019, with auto loan originations reaching near-record highs and mortgage originations increasing significantly year-over-year,” Lee said.

In his Congressional testimony, Powell said the robust jobs market has benefited a wide range of individuals and communities, especially lower-paid workers who have increasingly availed themselves of credit.

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