Consumers Cannot Borrow at Zero Percent like the Banks
Posted by Michael A. Kamperman on January 11, 2010
The consumer is getting the shaft in the Fed’s zero percent interest environment. Consumer credit fell by over $17 billion in November, which is part of the all-important Christmas shopping season. But what’s even more disturbing is the federal government is allowing the tax payer bailed out too-big-to-fail banks to get away with highway robbery. Big banks have raised the interest rates on credit card customers who are current on their bills up to 30% in some cases. We already have a huge problem in that many consumers cannot access credit. But many who can access credit are getting gouged. There is simply no acceptable reason for banks to be allowed to charge usurious interest rates when the Fed is letting them have money almost for free. The Fed’s policy of low interest rates is working to give the banks a chance to earn some income to cover their swept under the rug losses. However, the Fed’s low interest rate policy is failing to jump start the economy because the consumer is not seeing the low interest rates passed on to them, except for home mortgages. But most people cannot buy a new house because they can’t sell the house they live in and they cannot refinance because their current mortgage is underwater. Hence, this is having a limited impact on reviving the economy. The consumer’s inability to access affordable credit is paramount to a contraction in the money supply. Since the money supply is already contracting without factoring in the interest rate differential, the risk of persistent deflation rises daily.
The Federal Reserve needs to quit talking nonsense about an exit strategy and needs to get serious about printing a lot more money. There is no way the housing market will survive if mortgage interest rates rise further. That is all but certain to happen if the Fed ends its purchases of mortgages under its current quantitative easing program at the end of March. Nero fiddled while Rome burned. Right now the Obama Administration is fiddling while the consumer is being burned alive. It is up to Ben Bernanke to stand up and be counted. History calls.
It is also up to Congress to stand up and be counted. The recent “consumer protection” bill left a multi-month window for banks to abuse the little guy. And boys have they. Do they not realize that 70% of the U.S. economy is based on consumer spending? Do they not realize the consumer votes? Senator Dodd pushed this legislation through and now he has been pushed out. President Obama needs to call for change. He needs to call for change we can believe in. This economy is going no where if the consumer is not given a life-line, pronto.
Badtux said,
The issue is not that the Federal Reserve needs to print more money. The Federal Reserve has printed huge sums of money, the majority of which simply circulated right back through the banking system back into the Federal Reserve as bank reserves, doing nothing (zero) to foster economic activity. I pulled up the flow of funds numbers from the Fed for the past year and basically all but $500B of the trillions that the Fed has printed has ended up back in the Fed as reserves. Given that we had $5T in housing assets vanish out of the economy, that’s ridiculous — it’s a factor of ten less than what is necessary to prevent deflation, nevermind create inflation capable of pulling money out from under mattresses (or out of Federal Reserve bank reserves, same deal).
The issue is that the money needs to be pushed into the economy somehow in a way that will put it into the hands of people who will spend it on things that have a high employment multiplier. Public works, for example, has a huge employment multiplier because the contractors who win these contracts cannot simply shove it under a mattress. They must spend it on manpower and materials. The vendors of the materials can’t just shove it under a mattress either. They must spend it on *their* workforce and on obtaining upstream raw materials. And so forth. The problem is one of *scale*, the effective stimulus passed by the Obama administration — approximately $500 billion — once again is woefully insufficient given the huge decline in consumer spending.
Then there’s other ideas, but we’ve talked about those before. But money has to get into the hands of regular people, not bankers, because bankers are just shoving it under (virtual) mattresses, money that makes one loop through the economy and ends up right back at the Fed does woefully little to stimulate economic growth. But I have no idea how the Fed can do that task of getting money into consumer’s hands in a way that creates consumption, given lack of cooperation from an Administration that appears to be doing its best Herbert Hoover imitation of pretending all is well and that woefully inadequate stimulus/assistance measures are sufficient… even a Friedman-style helicopter drop would just have the money making one loop back into the Fed’s vaults as the money went to pay off consumer’s debts rather than into consumption. Without fiscal stimulus to make the government the consumer of last resort, fiscal stimulus that is not coming in sufficient amounts from the administration of Herbert Hoover II and not at all from the 50 Little Hoovers in local statehouses, how can printing money be any use?
Michael A. Kamperman said,
Bank lending is a factor of both reserves/liquidity/capacity….and capital. The regulators are letting the to-big-to-fail banks manage the recognition of losses over time in an attempt to earn their way out of the problem. The banks are deleveraging their loan portfolios to align them better with their inadequate capital bases. Factor in the loss of the loan securitization market and credit availability is severely restricted. Since the banks are able to invest in risk free Treasuries and ride up and down the steep yield curve to earn an acceptable return, they have no incentive to resume risk based lending.
But imagine how much worse everything would be if the Fed didn’t print $1 trillion to purchase mortgages in the last year? We need the Fed to purchase the lions share of U.S. Treasuries and force the buyers of those risk free assets further out on the risk curve. It would also free Congress to spend the amounts of money on infrastructure and other projects to stimulate demand in the economy without fears of rising debts crippling future budgets.
Then we need to get creative. We don’t want to try to re-inflate California real estate way beyond the ability of middle class buyers to purchase them again. But with the backing of the federal government we could re-ignite the auto securitization market to sell a couple of million more cars in 2010 than is currently projected.
Badtux said,
“they have no incentive to resume risk based lending.”
Therein lies the problem with deflationary expectations in a nutshell. Without inflation, money disappears under mattresses under the expectation that it will increase in value in the future or be more valuable if used at some point in the future once the economy turns up. Money under mattresses — velocity zero — effectively disappears insofar as its principal purpose which is to foster commerce and thus create jobs and real wealth. The banks believe that if they hoard, they can make more profit with their money once the economy turns up than if they loaned it out at reasonable interest rates today. The issue of hidden losses doesn’t help, but I don’t think they’d open up lending even if they had $0 bad debt on their balance sheets, because they simply view the money as being more valuable if loaned out once the economy turns up than it’s worth now. So once we hit the zero bounds, any printed money is just getting stashed under (virtual) mattresses as banks wait for an up economy where they think they can make more profit with their stashed hoards.
Which I suppose might be one reason the Obama administration insists, insists I say, that the economy is turning up — they’re doing a bit of Jedi mind trick on the banks. But it’s not working, obviously.
IsraelFinancialExpert said,
Well, the housing market and the economy will by no doubt crash if the fed stops Q.E. but if they do print more at this market enivorment than they will get oil at 150 like they got it in July 2008 regardless of what happens in the real economy. People have little faith in the Fed and most important thing is to prevent a combination of a falling dollar(vs oil and gold more than other fiats) and a credit curnch. That’s what happend in Iceland and we all know how that ended. They have no choice but to play Yo-Yo. To let the market fall with oil and then print. Once oil and gold go up too much, then they must stop until the market calms down.
The last thing the fed needs is a situation where they are dealing with a credit crunch and oil is out of control. Then they can’t do anything. You can’t announce Q.E when oil is at 100+ dollars. They where there at July 2008 and they had to let half of the banking industry to go bust before they did something
Badtux said,
Izzy, granted, if we drive people away from buying Treasuries by having the Fed buy them up en-masse to print money, they’ll find something else to invest their money in and drive up the price of other commodities such as oil. On the other hand, in a deflationary environment that would be *good*, because inflation causes both banks and consumers to stop hoarding their money and put it back to work as loans or purchases (since their money is declining in value with every passing cent that the price of oil goes up).
In short, I think you just uncovered a benefit to just plain printing of money by buying Treasuries that I hadn’t considered before, even though I should have, given that Kamperman has mentioned it.