The Fed Calls 2008-Style Household Defaults 'Stable'

Credit card companies and auto lenders are extracting record debt from households at 2008-level default rates.

Here are the numbers. The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, released August 12, shows total credit card balances at $1.26 trillion — within $21 billion of last year’s record $1.28 trillion. New auto loan originations hit a record $211 billion in the second quarter, the highest quarterly total on record. The 90-or-more-days-past-due rate on credit card debt hit 12.8 percent, up from 7.6 percent in late 2022. Fed researchers described those rates as “not seen since the Great Recession.”

Stable. The word the Federal Reserve chose to describe a credit card delinquency rate last seen during the 2008 financial collapse is “stable.” The same report notes the pace of new delinquencies “remained stable for roughly two years.” That is a methodological choice, not a finding. The Fed’s own researchers wrote the indictment of the level and the exoneration of the trajectory into the same document. A rate that is not accelerating can still be at a level that the Fed’s own report says only appears during deep recessionary distress. The Fed named that distress. It declined to escalate it into the headline framing.

This is not a pandemic transition. It is the steady state.

Three other receipts from the report.

The compositional shift in delinquent debt is doing the methodological work. The aggregate share of household debt held by borrowers behind on payments fell to 4.7 percent from 4.8 percent in the prior quarter. Mortgage balances — the largest single category of household debt — saw a small decline. Student loan balances also declined. The aggregate fell because mortgage and student loan portfolios are still moving below their post-pandemic peaks. The credit-card portfolio is moving in the opposite direction. The aggregate is the wrong number to look at. The compositional shift toward the highest-cost consumer credit products is the number to look at. Main Street Independent noted the same pattern when the credit card delinquency rate first crossed the 2008 peak line this summer.

The inflation environment producing this is documented, named, and traceable. Consumer prices rose 0.1 percent in July from June, the BLS reported the same morning; year-over-year inflation is 3.3 percent, above pre-Iran-war levels. That is what Lucia Dunn, professor emerita of economics at Ohio State, is describing when she says, “A lot of this is feeding your kids, going into stores, people buying their school supplies, the groceries, the baby formula, the diapers. I’m sure a lot of those people have to carry a balance because they are just simply strapped economically.” Dunn distinguishes between transactors — households that pay the balance monthly — and revolvers, who carry debt month to month. The 90-days-past-due rate is the revolver rate. It is the working-class and lower-middle-class balance sheet the Fed report is documenting. The credit card industry’s record profits sit underneath this same household-side distress — extracted from the same families the 12.8 percent rate records as defaulting. The June coverage tracked the revenue side of the same ledger.

The historical comparison is right there. In 2008 the consumer-credit cycle produced the Great Recession. The mechanism then was mortgage debt extended against inflated housing values to households that could not afford the underlying obligation. The instrument today is different — credit cards and auto loans rather than mortgages. The mechanism is the same: credit extended against already-stretched household budgets to families paying 3.3 percent more year-over-year for the same groceries, diapers, and school supplies. The borrowers did not choose the inflation. They did not choose the 3.3 percent. They are carrying the 12.8 percent.

The procedural record matters here. The Fed’s Quarterly Report draws on a nationally representative sample of consumer credit reports from Equifax. The 12.8 percent figure is not a survey estimate; it is a count of credit reports showing balances ninety or more days past due. The methodology is unchanged across the period in question. The number is what the documents say it is.

The standing authorities exist. The Consumer Financial Protection Bureau has rulemaking authority over credit-card late-fee schedules. The Federal Reserve sets the policy rate that prices revolving credit. The state regulators license the issuers. The credit card issuers did not lower the interest rates when the delinquency rate crossed into Great Recession territory. Neither the rate, the late-fee schedule, nor the licensing posture has been moved against a 12.8 percent delinquency rate.

The Fed has chosen a frame. The frame is the indictment. The score is the score. The borrowers did not write the methodology. The Fed did not write the household budget. The standing authorities have not been used.