Contracting Consumer Credit is Crippling the Economy

Posted by Michael A. Kamperman on November 7, 2009

Consumer credit fell $14.8 billion in September from the previous month and contracted at an annualized rate of 7.3%.  This is the eighth month in a row of falling credit levels and sets the record for consecutive monthly drops going back to 1943 when they first started counting on a monthly basis.  Basically this is the worst it has been for consumer credit since the Great Depression.  Within a few months it also will be the worst it has been since the Great Depression for unemployment.  The two are intricately linked.  Because 70% of the U.S. economy is tied to consumer spending, then any cutback in demand by consumers leads to more unemployment.  The job losses will not end until the consumers increase their spending levels, which cannot happen unless the banks begin to open up their wallets and lend more money.  However, the banks do not need consumer lending to make money in the current environment.  Because short term interest rates are near zero percent the banks can borrow at extremely low rates and turn around and purchase risk free U.S. Treasuries earning a return above 2% on a laddered portfolio.  There is no incentive for Zombie banks with existing loan losses swept under the rugs to take new risks when they can make money risk free. Whatever lending they are doing for consumers is being done at much higher interest rates.  So consumers and small business owners are not seeing readily available credit at low interest rates despite Fed Fund rates near zero.  This is why the Fed needs to up their program of quantitative easing.  They need to take away the risk free money machine from the banks and force them out on the lending risk curve to make money.

 

The biggest obstacle to fixing the broken consumer credit markets is the Obama administration wants to transform our economy from a consumer driven model to a production and export driven model.  They basically want us to look more like Germany and China where we produce, ship, and save.  The only problem is common sense seems to be absent in the Whitehouse’s economic war room.  China’s dominance in exports is due to currency manipulation.  The Treasury Department seems content with letting the dollar slide to ramp up exports.  The only problem is the American standard of living would have to vanish for us to become cost competitive with China.  And does the Obama administration understand Germany sits in the middle of Europe and is surrounded by other European Union countries?  Just because a bakery in Germany can deliver goods 20 miles away in France doesn’t mean that bakery is ready to be competitive with trans-Atlantic shipments.  And have they considered the best market in the world for exports is the U.S. and that we cannot export to ourselves?  And even assuming they could successfully transform the American economy to this new model have they considered how many decades it might take to get there?

 

The solution to restoring the economy back to health is not that complicated and it starts with fixing the still broken credit markets so that consumers and businesses can once again borrow money on reasonable terms.  But this requires a belief in a consumer driven economy, which basically means it requires a belief in the American standard of living.  It also requires a belief in subprime lending (which is distinctive from AAA rated fraud).  Unfortunately, the Obama economic team does not share these beliefs and is on some Don Quito ivory tower quest to transform us into something we are not.  If only we could re-label interstate commerce as exports, then we could trick Obama’s team of economic geniuses into believing that a bakery in Missouri that sells a loaf of bread to a store in Kansas is just as valuable as a local German border bakery selling a loaf of bread to a local French border store.