Dan Alpert's Two Cents

Let’s Burst this “Banks Won’t Lend” Policy Trial Balloon Before it Leaves the Ground, Please

David Reilly writes in today’s Wall Street Journal Heard on the Street column about how policy makers are pressuring banks to lend more to consumers, and are even considering novel measures providing targeted liquidity to encourage them to do so.  Reilly notes the opposite view, not without some merit, that consumers don’t wish to borrow as they “still are largely in debt-shedding mode as they try to restore household balance sheets.”  I think this is true only to an extent, and over-belief in either the foregoing maxim – or the notion that banks are simply refusing to lend – can be dangerous if we don’t consider the rest of the picture.

Simply put, outstanding consumer credit has now surpassed its bubble-era high. So clearly people are borrowing – albeit mostly for education and autos. Revolving credit balances (aka. plastic), which were declining,  have started to rise as payrolls stall amidst continued increases in healthcare, education and, intermittently, food and energy costs.

When the underwater portion of first mortgage loans and now-mostly-uncollateralized, fully-drawn HELOCs and second mortgages are added to the mix, real “consumer-credit” has blown past all prior metrics (adding between $750 billion and $1 trillion to “unsecured” consumer debt).

I believe the events of the past decade have proven beyond doubt that consumers are pretty near always inclined to borrow and consume if credit is showered upon them. We have already, in fact, set ourselves up for a credit crisis in student loans and potentially in the re-emergence of subprime auto, that has already begun in the former in my opinion.

Yes, some folks are being more careful – as well they should. But even they can be tempted by low-interest-rate opportunities for immediate consumptive gratification. The problem is less that they are resisting and more that consumers’ creditworthiness (balance sheets) and incomes don’t warrant more borrowing.

Banks may actually be right on this one – they do desperately want to lend to shore up current earnings, but the long term costs of free credit for all who can fog a mirror are too fresh in the minds of both management and examiners.

The policy debate on this issue in Washington comes down to discussion between the financial institutions soundness and stability folks in the regulatory establishment, and the macro policy guys, mostly at the Fed and at Treasury (the latter of whom have run out of tools to reduce the household debt overhang and are now considering the “dark side” possibilities of yet more credit creation).

Let’s continue to root for the soundness and stability guys. After all, they missed the real issues for nearly a decade and know as well that the portfolio side of bank balance sheets are still bedeviled by legacy loans (those HELOCs and underwater first mortgages) that really are unsecured consumer loans and in great jeopardy, especially if the economy continues to soften.

Bottom line: It’s not that consumers don’t want to borrow, any more than alcoholics aren’t desperate to drink. It’s that they shouldn’t.

5 Responses to “Let’s Burst this “Banks Won’t Lend” Policy Trial Balloon Before it Leaves the Ground, Please”

William HalversonJuly 30th, 2012 at 2:03 pm

Of course there is too much consumer debt, like there is too much sovereign and commercial debt. Roubini would say that the globe has way too much debt and probably would advocate a removal of tax deductibility for all interest, but that's another post.

If we accept the public spin on all the QEs (to stimulate the economy) well then gee whiz Polly, why aren't banks loaning that money out? So take it away from them if they won't loan it, why not?

But adults already know that is just a cover story. The real reason? All those banks are insolvent if their CDS's on corporate and sovereign debt are triggered. All that QE money is earning banks profit in the shadow banking system in the hope there will be enough equity when the kimchi really hits the fan.

Robert P. CoutinhoJuly 30th, 2012 at 11:57 pm

The solution to the debt crisis is not to find the right people to lend to (there are none). The solution is to eliminate the debt. How to do that is a more perplexing problem. Probably the 'best' solution that I have seen is the debt jubilee.

The Debt Jubilee would consist of transferring to each and every person the same amount of (fiat-issued) currency. However, that currency would HAVE TO be used to eliminate debt first. Anyone who still had debt afterwards would have their debt level lowered. Anyone else would have money with which they could buy consumer items, etc. which would likely stimulate the economy. The bank balance sheets would, essentially, remain the same, with more money in deposits than loans. This would mean that a major source of their income (i.e. interest) would be lost. It would also be a major loss of income to those who held the debts (due to prepayment of the debts). Tough.

Meanwhile, the idea of the influx being 'unfair' would be shown to be ludicrous as each person would be given the same amount. The likelihood of inflation would be a problem, but a manageable one after, perhaps, one year. Meanwhile, the high unemployment would likely cease to be endless. The rentiers would no longer be living off of the labor of the lower 99% income earners. "Unearned income" would likely fall (other than stock dividends), thus reducing the power and leech-like draining power of the financial industry.

Just sayin/

TomJuly 31st, 2012 at 6:10 pm

This all very true. A lot of the misperceptions stem simply from the recent memories of the credit bubble, and the difficulty of accepting post-bubble conditions as normal.

I think we're further out on the credit cycle than most people imagine, and we are actually heading into a recessionary phase with the rate of credit expansion starting to slow. It's very important to recognize that the rate of credit expansion is essentially a demand component of GDP (or more precisely of final demand, ie GDP less net exports), and therefore acceleration/deceleration of credit expansion is a demand-side component of GDP growth/contraction. This is the so-called "credit impulse". It turned positive back in 2009, as the credit contraction started to decelerate. People still waiting for a positive kick to growth from a new credit cycle may have not noticed as entire credit cycle already passed them by. The bubble experience made them too jaded, too expectant of something bigger.

daveAugust 1st, 2012 at 2:01 pm

It's small business that is having problems accessing credit, not so much consumers. Consumers are having problems quailfying for large loans like mortgages, thereby agravating the housing situation. There is no problem with small unsecured loans like credit cards and car loans, but that won't help employment because buisness can't finance growth.

benleetAugust 25th, 2012 at 6:01 pm

Eliminating debt interest deduction to financial corporations would reap $77 billion a year according to Rep. Jan Schakowsky's budget proposal. It would change the dynamics of private equity firms and the financial market. About 70% of household mortgage debt interest deductions go to households earning more than $100,000 a year.… — R. Pollin at PERI advocates a jobs program, and so does Dan Alpert, see his publication "The Way Forward" — $240 billion a year for five years, total $1.2 trillion. This is like the jubilee proposal above except the condition for receiving the funds is employment on government projects. And Obama's $477 billion jobs program has some ($67 billion) but not much direct job creation in it.

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