The Bank of Uncle Sam?

As I sat in front of the TV Wednesay listening to Hank Paulson speak about banks and their needs to start up lending to individuals again, I wonder if a society like the US, which is so debt driven, is going to need to fall back on direct lending from the government to individuals. If monetary velocity continues to slow and banks continue to hoard capital, does the government have any choice? Is the Fed Discount Window going to become the latest drive-up ATM for American consumers? Is this the only way to put a bottom into the housing slide?

All signs point to continued reduction of risk at the bank level and resistance to lending from banks to individuals. Granted, LIBOR and TED spreads have narrowed, but banks are still reluctant to lend to each other and even more resistant to lend to cash strapped investors. We are currently mired in a global recession, the likes of which is due to get worse before it gets better. I believe that you will see contraction through at least Q3 2009.

As such, I am confident that despite the "urging" of the Fed, banks are due to contract lending further, and more importantly strengthen requirements for lending. If banks are reluctant to lend, where is the consumer to go? Credit cards. Data recently released shows that loan totals from consumer banks to consumers increased by $89 billion year over year through the end of September. Of that total, 69% of that lending, a staggering $61 billion, was debt through credit card usage. More foreboding is a look at the past few weeks.

According to Greg Weldon,

Commercial Banks outstanding credit card balances exploded $7.1 billion in one week (yes, one week) ending October 15th. This represents a weekly expansion of 1.9%, or an annualized increase of nearly one hundred percent (98.4%).

From August to mid-October, credit card debt increased by $32.3 billion. To compare, the 10 months prior (September 2007 to July 2008), credit card debt increased $29.1 billion. I know the numbers are hard to fathom, but in summary, the debt amassed on credit cards has risen more in the last 10 weeks than it did in the previous 10 months in total.

Where is a consumer to go? They are already unable get a loan from a bank, unable to pull equity (not that it exists) from their house and are maxed on their credit cards. We are pushing ever closer to The Bank of Uncle Sam opening up direct lending to individuals. The only hope now rests on the Fed purchasing enough equity in commercial banks that their "urgencies to lend" are heard.

Comments

[CLH:]

The only hope is that people will stop borrowing and save. It will take time but this will be the final result.

2008 Nov 14 06:08 AM

[prudentinve...:]

Wise comment from CLH. Borrowing for productive activities that create good jobs is fine. Borrowing to buy junk that gets used for a few weeks then goes to the landfill is false economics and bad environmentally.

2008 Nov 14 08:07 AM

[Smarty_Pants:]

The article makes it sound like people are lining up at bank loan desks and are being turned away because the banks won't lend.

Maybe the truth is that the lines are much shorter than in the past because most consumer borrowing was probably done via home equity lines of credit, which have since dried up due to negative equity on the home.

The FED, USTreasury, President, and the lame-stream media can blather on all they want about banks needing to loan but it won't help. As Keynes noted, "You can't push a string."

The consumer class is tapped out. What other reason makes even a tiny bit of sense in explaining the huge rise in credit card debt?

The chronic "spend beyond my income" folks have no other source for the 'beyond my income' portion available to them. They are grasping at 21+% annual interest rates to support their lifestyle, while it lasts.

When the credit card companies eventually shut down their cards they will go bust and we will see another wave of losses in the lending industry and another drop in consumer spending.

Unless and until the crazy 'borrow to spend' merry-go-round stops, the recession will continue. Only then will the country begin to build a base of savings to support productive activities and put the economy in forward motion.

Any and all efforts by the gub'mint to keep the merry-go-round spinning will only bring us that much closer to hyperinflation.

2008 Nov 14 09:39 AM

[Jason Rines...:]

Exactly Smarty Pants. The debt ratio of the consumer must fall. In order for that to happen, a wage increase must occur. This cannot happen without a VERY strong fiscal package of job creation and higher education. For some, bankruptcy and washing of debt must occur, but for most families the loss of one income is devastating. The country lived on the edge for too long. All our nation can do is restructure but on the positive side America can retool quickly. The negative side was that the weakness was well known in late 2007 and 2008 and that such an infrastructure program focusing on upward mobility was not started then.

2008 Nov 14 11:23 AM

[Robert Nabloid:]

It's been said well be all the commentators! America has been hiding it's economic situation with unsustainable borrowing rates... We took on way too much debt and that hid our problems of economic competitiveness for the last decade.

2008 Nov 14 04:39 PM

[Kunst:]

When the government devalues the dollar by creating a whole bunch of new money, if interest rates on existing balances are frozen and no new debt is taken on, the old debt can be paid back with cheap dollars. This devaluation thing is tricky. It requires really smart people, like Paulson and Bernanke, to figure out the fine details.

2008 Nov 14 09:48 PM

[goldilocks:]

Kunst, Thanks for making me smile !

2008 Nov 15 07:38 AM