U.S. Flow of Funds: Deleveraging Occurs As Asset Values Decline

For the year as a whole, total credit market borrowing grew just 5.5% which was the weakest advance since 1993. And all sectors pulled back their borrowing -- except the Federal government whose liabilities grew at a 24.2% rate, nearly a record. Nongovernment domestic liabilities retreated as the recession forced deleveraging. (Or was it the other way around?) These liabilities fell slightly, for the first time ever, during 4Q.  They grew just 2.3% for the year as a whole, nearly a record low.

Borrowing by the household sector evaporated as it posted a nearly unprecedented 0.5% q/q drop. Mortgage borrowing dropped a breathtaking $69.7B (-0.4% y/y) which was nearly double the 3Q drop. Both are records. Consumers' credit liabilities rose a meek $3.9B (1.7% y/y) with growth in spending turning sour. The value of bank loans fell 15.2B (+15.4% y/y) as the credit crunch unfolded.

Credit market debt owed by the financial sector remained strong with a $304.7B increase, though the year-to-year growth rate of 6.4% was roughly half that in 2007. Liabilities at commercial banks rose a much reduced 12.7% y/y while savings institutions liabilities fell by 2.8%.  · The liabilities of the foreign sector shrank about as they did during 3Q by $106.7B.

The other side of the balance sheet, of course, was equally as bleak. The value of the household sector's financial assets fell by nearly $9 trillion. The value of equity market shares fell by $3.7 trillion or by 39.9% y/y over the course of the year and mutual fund share values also fell by one-third or by $900 billion. Pension fund reserves were whacked by $3 trillion during the year or by 22.4%. Tangible asset values suffered somewhat less than financial values, but the direction of change was the same. The value of tangibles overall dropped $2.4 trillion following the $1.1 drop during 2007. Those declines were nearly all due to the reduction in real estate values.

Lower asset values lowered the net worth of the U.S. household sector last quarter and over the course of the year deteriorated by more by than ten trillion dollars. Household net worth was at it's lowest level since 2003.

Mortgage lending reform is yesterday's House subcommittee testimony by Sandra F. Braunstein, Director, Division of Consumer and Community Affairs, Federal Reserve Board and it can be found here.