Wednesday, 8 April 2009

Consumer Credit Only Beginning to Fall

The Fed released preliminary February data for consumer credit, which doesn’t include mortgage debt.


The pace of borrowing by U.S. consumers fell in February as fewer Americans sought credit to make purchases amid what may become the worst recession in seven decades.

Consumer credit fell by $7.48 billion, or 3.5 percent at an annual rate, to $2.56 trillion, the Federal Reserve said today in Washington. Credit increased by $8.14 billion in January, more than previously estimated. The Fed’s report doesn’t cover borrowing secured by real estate…
As you can see in the chart above, consumers have built up a mountain of debt over the last 20 years.

(Click to enlarge)

Note in particular the growth of securitization. According to the Fed, “these balances are no longer carried on the balance sheets of the loan originators.”

What Alan Greenspan and so many others toasted as The Great Moderation, was nothing more than moving risks off balance sheet.

Risk didn’t disappear, it was just moved. Originators cared little about the quality of their loans because they were packaging them into securities to be sold to investors. Securities were rated AAA so investors felt protected. Default rates were low so who was going to argue?

But of course default rates were low. The avalanche of liquidity allowed consumers to rollover/refinance at every turn. Remember analysts talking about “the resilient consumer” back in 2005-2007? It’s easy to be resilient if credit is limitless.

For the economy to recover, consumers need to repair their balance sheets, which means debt has to be paid down or written off. The ride up the credit mountain sure was fun. The ride down won’t be.

Source: Option Armageddon

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