Consumer debt levels fell again in August for the seventh month in a row. Facing continued instability in the job market, people are paying down their debt, as a way to protect themselves. Savings are up, and borrowing is down – which could weaken the recovery. Consumer spending accounts for 70% of economic activity in the United States.

Total consumer debt outstanding dropped by $12 billion in August, according to the Federal Reserve, reflecting an annualized rate of 5.8%. Reality outpaced Wall Street's expectations, which were around $10 billion. In July, consumer debt outstanding fell $19 billion (9.1%), which was the largest in hard-dollar terms since 1943 and on a percentage basis since June 1975's 16.3%.

While consumer fear is playing a significant role, as a touchy housing market and dicey job situation leave little to lean on, the banks are also responsible for the change in direction. They aren't lending as easily, with stricter standards limiting the amount of credit available to consumers. You can't spend what you can't borrow.

Helping people with troubled mortgages is supposed to keep them in their homes and , over time, stabilized the housing market. The FDIC and Congress have urged that more money from the TARP be used for the purpose of propping up home loans instead of improving bank balance sheets.

The conventional wisdom about helping homeowners make payments may be wrong. According to The Wall Street Journal, a report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision shows that "More than half of loans modified in the first quarter had slipped back into delinquency after six months, and were 30 or more days past due by the end of September."

Not very promising progress. The theories from federal officials about why this is happening were not very helpful.

A look at the average troubled mortgage-holder may be more useful. This is a man who may lose his job as unemployment rises from 7% to, perhaps, 9%. He has little prospect for his income to rise. He may have large amounts of credit card debt but no access to additional credit. He may have an expensive home equity loan. And, perhaps worst of all, the value of his home may be way below the value of his mortgage. He may be facing the fact that he will never get a dime of equity out of his house.

The idea that helping troubled mortgage-holders may break the fall of housing prices could be deeply flawed. That would mean that pouring tens of billions of dollars into the home mortgage market may have very little effect. Better to make people fell that their jobs are secure and that they have access to credit at reasonable costs. Maybe then homeowners will fell that paying their mortgages makes some sense.

Douglas A. McIntyre is an editor at 247wallst.com.

Bloomberg News reports that consumer borrowing -- as measured by credit card receivables -- grew much faster than expected in March. Specifically, the 9% growth to $2.56 trillion was twice the rate of increase that economists had expected (the actual increase was $15.3 billion vs. 34 economists who expected $6 billion). The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

And as consumers are increasing their indebtedness, they are also having more trouble paying it back. Overdue payments at the six largest U.S. credit-card lenders reached the highest level since November 2004, according to data compiled by Bloomberg. It found an average of 4.11% of loans were at least 30 days late in February and March.

Bloomberg quotes Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York who says it all: "incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression. The days of extracting cash from one's home to spend on goods and services are long gone."

With consumer spending accounting for 70% of GDP growth, that's why I suggested selling into the sucker's rally that peaked last week.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The Boston Globe reports that credit card companies have been targeting subprime mortgage holders.

The evidence is stunning. Direct mail credit card offers to subprime customers in the US jumped 41% during 2007's first half, compared with the first half in 2006. By contrast, direct mail offers targeted at customers with the best credit fell 13%. During this same period, defaults on subprime mortgages rose significantly -- in June, nearly 20% of subprime mortgages were at least 60 days past due, and more than 1 in 20 were in foreclosure.

The leaders in selling higher interest rate credit cards to the financially vulnerable includes some subprime mortgage leaders. Here's a partial list:

Yesterday I was raked over the hot coals by several readers that feel we are doomed by a housing bubble that I would not accept. See: Housing Truth from Main Street; which turned out to be quite a controversial post.

I stand by most of what I wrote. However, there were plenty of valuable insights that are worth reflection among the ranting and raving. A particular comment by David Gross, although not very deep is important for its simple summary of many comments. It stimulated a response from me that I thought was worthy of a separate post and further discussion.

David's Comment