PhotoMark Dow, a Wall Street money manager for Pharo Capital Management, says our current economic problems are not caused by too much regulation or by Obama Administration policy, but by one simple thing – too much household debt.

In a webcast interview this week with the Daily Ticker, Dow said consumers took on too much debt, creating an overhang that only time can cure.

“The government can kind of prop you up until you are sober enough to walk on your own, but ultimately you have to walk on your own,” Dow said.

Only by getting out of debt, Dow says, can Americans resume a spending level that will support economic growth.

Academics agree

Hundreds of miles from Wall Street, researchers at the University of Iowa have concluded much the same thing after studying how consumers got into so much debt. They conclude that it happened over more than three decades of easy money.

In the 1970s, it was hard to run up debt and few families ever got to the point of bankruptcy. Bankruptcy filings have grown overall from about 110,000 in 1960, to over 1.6 million in 2003, according to the U.S. Department of Justice. Filings dipped to 480,000 in 2007, then jumped back up to nearly 1.1 million in 2010.

What's so different between now and then? For one thing, the researchers say, there were tighter credit standards for all types of credit.

1970s credit standards 

University of Iowa Sociology Professor Kevin Leicht analyzed data from a 2007 survey of 2,400 bankrupt Americans. He applied credit limits of the 1970s – a mortgage no greater than 30 percent of income, a car payment no more than 10 percent of income, and a single credit card with a $1,000 limit.

Leicht's study suggests that one-quarter of households that filed for bankruptcy in 2007 would not have been in that situation if the credit regulations of the 1970s had remained in place.

$667 per month less

If the tighter restrictions still existed, the average person in bankruptcy in 2007 would have spent $667 per month less on debt payments. That's substantial, Leicht says, considering the median income of the bankrupt households was just $23,000.

"Families in bankruptcy today struggle with hundreds of dollars more in monthly payments than the prior generation could have ever borrowed," said Leicht. "They are stressed by debt burdens that would have been unthinkable, not to mention illegal, under regulations that existed just three decades ago."

Why did families run up so much debt, and more importantly, why were they allowed to? The reason is simple, says Leicht. People's wages began to stagnate. Without credit, they could not maintain a rising standard of living, spending money to grow the economy.

Not earning enough money

To cope with it all, workers put in more hours, reduced savings and increased debt. A married couple's average number of paid hours of work rose from 53 per week in 1970 to 63 in 1997. The percentage of families where both spouses work rose from 36 percent to 60 percent. And average credit card debt per household more than doubled, from $3,000 in 1989 to $7,300 in 2007.

"The expansion of credit made possible by deregulation enabled families to maintain the image of middle-class respectability even as they struggled to stay afloat," says Leicht, who co-authored a book on the subject, Postindustrial Peasants: The Illusion of Middle-Class Prosperity. "We loan people money for consumption, which means they'll keep buying products even if employers don't pay them well."

Getting paid more, says Leight, is the way out of the debt morass. Consumers determined to get out of debt and stay that way can't spend more to boost the economy unless they earn more.  

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