Greenspan - Household balance sheets generally in good shape

WASHINGTON -- American households' finances are generally in good shape even though consumers have built mountains of debt and bankruptcy filings have surged, Federal Reserve chairman Alan Greenspan said Monday.

Decades of low interest rates and extra cash from refinancing have given people flexibility to better manage their debt, the Fed chief said in a speech to a credit union conference.

The financial health of consumers is important to the economy, which in the second half of last year finally cast off its lethargy and has been growing at a healthy pace. Consumer spending accounts for roughly two-thirds of all economic activity in the United States. A widespread deterioration in households' balance sheets could seriously crimp spending.

Consumer debt hit a record $2 trillion in December, according to the most recent figures of the Federal Reserve. That debt includes credit cards and car loans, but not mortgages.

More than 1.6 million people filed for personal bankruptcy in fiscal year 2003. Continuing the record-setting pace of recent years, personal bankruptcies rose 7.8 percent in the year ending Sept. 30.

, according to the Administrative Office of the U.S. Courts.

While elevated bankruptcy rates in the past several years are troubling because they highlight the difficulties some households experience during economic slowdowns, Greenspan said that "bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions and they can be significantly influenced over time by changes in laws and lender practices."

Greenspan noted that delinquency rates on credit card payments have been falling during the past year even as consumers' credit card debt has grown. The rise in credit card debt in the latter half of the 1990s, he said, is mirrored by a fall in unsecured personal loans. That suggests homeowners have shifted a variety of payments to credit cards given their wide availability and convenience, he said.

Two gauges the Fed likes to use to assess the extent of American household indebtedness and to get a view of the financial health of the overall sector "rose modestly over the 1990s," Greenspan said. "During the past two years, however, both ratios have been essentially flat."

The debt-service ratio measures the share of income devoted by households for paying interest and principal on their debt. When the debt-service ratio is high, households have less money available to buy goods or services, the Fed chief explained. The Fed's second measure, called the general financial obligations ratio, incorporates households' other recurring expenses, such as rents, auto leases, homeowners' insurance and property taxes, he said.

"Overall, the household sector seems to be in good shape and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress," Greenspan said.

"And, in fact, during the past two years, debt-service ratios have been stable," he added.

Greenspan pointed out that U.S. households own more than $14 trillion in real estate assets -- almost twice the amount they own in mutual funds and directly hold in stocks.

Home mortgage refinancings and a solid rise in home values helped to bolster consumer spending during economic hard times as well as during the recovery, Greenspan said.

"Over the past two years, significant increases in the value of real-estate assets have, for some households, mitigated stock market losses and supported consumption," Greenspan said.