Credit in the US is collapsing

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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

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