Credit in the US is collapsing

If you haven’t noticed, credit is hard to come by these days. And the data are finally showing this state of affairs. The latest data from August show that consumer credit plunged by $7.9 billion, the most since record keeping began.

Credit is the lifeblood of any economy. When credit contracts, so does the economy. Why is the treasury going around buying up bad assets at inflated prices when Joe Six-Pack can’t get a loan to fund his small business? Shambolic.

Notice that consumer credit did not decline in the last recession due to unusually low interest rates. That was an aberration that helped foster a bubble.

Borrowing by U.S. consumers unexpectedly fell in August by the most on record as banks shut off access to loans, a report from the Federal Reserve showed.

Consumer credit fell by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion, the Fed said today in Washington. In July, credit rose by $5.2 billion, previously reported as a $4.6 billion gain. The Fed’s report doesn’t cover borrowing secured by real estate.

Consumer spending, the biggest part of the economy, is likely to keep faltering as banks hoard cash, job losses mount and property values drop. The decline in borrowing underscores why Fed policy makers today announced they will create a special fund to purchase commercial paper in a bid to open the flow of credit to the nation’s businesses.

“This is what happens when consumers are fearful and banks tighten lending standards to all applicants,” said Richard Yamarone, chief economist at Argus Research in New York. “No one borrows, no one lends. It’s a classic example of a frozen credit channel.”

Economists forecast an increase of $5 billion in consumer credit during August, according to the median of 29 estimates in a survey conducted by Bloomberg News.

According to the Fed, total consumer borrowing dropped at a 4.3 percent annual rate in August, the most since January 1998, during the Asian financial crisis.

Revolving debt such as credit cards decreased by $612 million during August and non-revolving debt, including auto loans, dropped by $7.3 billion.

Late Payments

The number of credit card bills paid late increased in the second quarter, according to the American Bankers Association, rising to 4.54 percent from 4.51 percent in the first quarter. The average bank card delinquency rate over the last two years is 4.44 percent.

Discover Financial Services, the credit-card company spun off from Morgan Stanley, said third-quarter profit declined 11 percent as late payments increased, the Riverwoods, Illinois company announced Sept. 25. Discover has lost almost half its market value since it was spun off in June 2007.

Figures released last week show auto sales tumbled 27 percent in September as the credit crisis and slowing economy dragged the industry to its worst month since 1991.

A quarterly Fed report issued on Sept. 18 showed household wealth fell from April to June for the third consecutive quarter and borrowing slowed as home prices dropped and lenders pulled back. Net worth for households and non-profit groups decreased by $438 billion in the second quarter to $56 trillion, the lowest since the end of 2006, according to the Flow of Funds report. Real estate-related assets declined by $258.8 billion, following a $299.5 billion loss.

Bloomberg

3 Comments
  1. Mark Wadsworth says

    Why is the treasury going around buying up bad assets at inflated prices

    Good question.

    First of all, banks should make a sensible write down on their mortgage advances. Then shareholders and bondholders should work out how that loss is to be shared between them via debt-for-equity-swaps.

    After that, banks will be recapitalised and owned by people who understand the pain of reckless investing and lending.

    Joe Six Pack is the innocent victim in all of this.

  2. Edward Harrison says

    Joe Six Pack is the innocent victim. And I promise to address this debt-for-equity swap idea. As you know, Buiter likes this and it has merit. What do you think of Gordon Brown’s latest proposal? No debt for equity but it gets the ob done a lot better than Paulson’s plan.

  3. Brendan says

    Edward,
    Has it occurred to anyone that the Fed is attempting to sequester demand with the express intention of creating wage deflation? They would like to see reflation in the stock markets, stable commodities prices overall including oil together with massive wage deflation. It is not politically feasible in the US to impose austerity measures. They see this action is the only method of promoting globally competitive manufacturing and services back to US shores. The problem with this assumption is that China will not unpeg its currency from dollar and the rest of the world as a whole also has a vested interest in a strong dollar or their Treasury assets go up in smoke. As a result, Mr. Geithner continues on his futile rampage of threatening China over its monetary policy and calling on surplus nations to ramp up their domestic demand with the aim of creating wage inflation in these nations. But in the likely event of failure to realize this futile goal, the Fed plans to deflate and dumb down US wages to match that of China. The wage differential with China is 1:8. In other words, it’s unlikely there will be wage parity for several generations to come. With a debt to GDP excluding unfunded entitlements close to 100%, the US is way out of time. The game is already up. It’s time for Americans to take the lead, wake up and get back to work digging copper from the mines and creating domestic demand just like we preach to other nations. These idiots at the Fed are smoking crack and oxycodone, on the job.

    B.Graham
    brendan@usysinc.com

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