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posted on 29 August 2015

Do We Know What We Owe? Consumer Debt As Reported By Borrowers And Lenders.

from the New York Fed

The state of scientific knowledge regarding U.S. consumers' affluence and relationship to financial markets is based in many ways on survey data, and, in particular, on the Survey of Consumer Finances (SCF) published by the Board of Governors of the Federal Reserve System. For example, an extensive and influential line of research establishes the prevalence and importance of consumer liquidity constraints in the United States using SCF debt and related data.

Much of our understanding of U.S. wealth inequality over recent decades derives from analysis of SCF net worth figures. Recent papers use SCF debt data to address a wide variety of topics relating to consumer balance sheets, such as the use of debt by low-income, unemployed, and bankrupt households.

However, other recent findings bring into question survey respondents' propensity and ability to report debts accurately. Lusardi and Tufano (2009) pose simple questions to U.S. survey respondents on the functioning of debt contracts. They report discouraging findings: "Debt literacy is low: only about one-third of the population seems to comprehend interest compounding or the workings of credit cards." Karlan and Zinman (2008) find that, among first-time borrowers from a leading South African "cash loan" firm, 50 percent fail to report their high-interest loans in a subsequent survey. Most pertinent to the question at hand is Zinman (2009), who compares the aggregate credit card debt levels implied by the SCF for 1989-2004 to aggregate credit card debt levels from the lender-reported Consumer Credit-G.19 data provided by the Federal Reserve Board of Governors. Zinman finds an undercounting of credit card debt in the SCF relative to the G.19 data of roughly 50 percent, and a divergence of the survey and the G.19 measures over the period.

[click on image below to continue reading]

Source: http://www.newyorkfed.org/research/epr/2015/EPR_2015_comparisons_brown.pdf

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