Banks And Consumers Say No to More Debt 35 comments
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More Debt Rejected As a Solution For the Debt Crisis
How many times since the current financial crisis began, have we been told by the Government that the key to an economic turnaround is easier credit and more lending? The Federal Reserve and Treasury have supplied virtually unlimited amounts of credit and guarantees to the banking industry to increase lending activity. The government is refusing to allow the return of TARP funds, demanding instead that the money be lent out.
There’s just one problem with the government’s attempt to force more borrowing; consumers don’t want to borrow and banks have few qualified customers. In a Wall Street Journal report that must be causing fits in Washington, we learn that the major recipients of TARP funding have dramatically reduced new lending activity.
Bank Lending Keeps Dropping-WSJ
According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.
Banks defend their lending, saying they’re eager to issue new loans, refinance existing ones and modify those in danger of default. Complicating their efforts, bank executives say, is a decline in demand among consumers and businesses.
But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. Commercial lending slumped by about 40% over that period, the data indicates.
Of the 19 banks, the only ones to originate more loans in February than October were BB&T Corp., a regional bank based in Winston-Salem, N.C.; Wall Street giant Morgan Stanley; and State Street Corp., a Boston-based company that provides financial services mainly to institutions and wealthy individuals.
One of the banks showing the biggest lending decline was J.P. Morgan Chase & Co. In October, the New York bank made or refinanced $61.2 billion in loans. That figure declined 35% to $39.7 billion in February.
J.P. Morgan executives defend their lending levels. In the first quarter, the bank extended about $150 billion in new credit to consumers and businesses, “despite the fact that loan demand has dropped dramatically,” a spokesman said. In March, the spokesman said, J.P. Morgan made $65.5 billion in new loans — slightly more than it made in October.
So Why Aren’t The Banks Making Loans?
Banks are in business to lend money so why the decline in lending activity? The extension of credit under normal circumstances is vital to economic growth and prosperity. The reality of the current situation is that the banks (and every other financial institution) have for decades recklessly extended credit without regard to the ability of the borrower to service the debt from income.
This financial crisis is different and will not be solved by extending additional credit to overextended borrowers. The banks and their customers recognize the risk of too much debt while the Government continues to mindlessly encourage more borrowing.
US Consumers Facing Reality
As noted above, a JP Morgan spokesman stated that “loan demand has dropped dramatically”. The reasons for reduced loan demand are obvious and include the following: declining income, a low savings rate, an already intolerable debt load and a trend towards frugality. The American consumer has wisely concluded that more debt will only make his financial situation worse.
Debt Levels Soar As Incomes Stagnate
The 2nd chart’s blue data curve since 1979 (in 1993 dollars) can be compared to the above chart’s 1970-1978 - showing next to nil growth. The pink data curve from 1979-2007 expresses this in 2007 dollars. This computes real income compound growth for this 37 year period (1970-2007) of a measly 0.26% per year (about $10/month) average, compared to 12 times faster income growth of 3.7% annually in the prior 23 years, 1947-1970.
Income growth for the average wage earner has been essentially flat since the early ’80s. The early 80s was also the beginning of the greatest credit expansion in history. Easy credit growth on a massive scale did not increase real incomes in the past nor will it do so going forward. The statistics on income will be even more abysmal when updated to 2009, reflecting salary decreases and an unemployment rate approaching 10%. The nation does not need more debt but rather more income.
Savings And Home Equity Decline
The false “prosperity” of the past based on credit fueled asset appreciation caused many consumers to believe that saving was no longer necessary. The collapse of values in stocks and real estate has now left many consumers with little net worth or liquid savings.
The American consumers have recognized that borrowed money is not income and that taking on more debt is not the path to prosperity; they are making the necessary sacrifices to improve their financial future. The US Government, obsessed with pushing more credit onto over leveraged borrowers, would do well to follow the example of its citizens.
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This article has 35 comments:
I don't need a loan. I need customers. I need to make money not borrow to cover losses while I try to survive.
Yet ... That's what was served up for me.
What the government has to do is get rid of uncertainty. It is not knowing (having an inkling) as to what is going to happen over the next few years that keeps me from being willing to invest.
How in the heck is government going to get rid of uncertainty?
It starts with credibility. I don't trust the FEDury further than I can throw Mount Rushmore. I don't trust the numbers coming out of financial institutions. I don't trust Congress to do the right thing.
The best way to create trust is for them to quit prodding the dumb ole animal spirit and start telling me the truth.
"They" can start with the stress test results.
"The nation does not need more debt but rather more income."
> jack
We are in the formative stages of a new paradigm to rebalance excess leverage, insufficient savings and excessive and wasteful consumption.
PIMCO's Bill Gross has alluded to this new order and yesterday Bloomberg quoted Nobel economist Michael Spence as saying
"the U.S. economy will also change in the next few years. “There’s no question we’re going to have a new normal,” he said. “It’s going to have a higher savings rate, closer to a match with the investment rate.
"We’ll probably have a period where the cost of capital is higher because leverage is lower, and I think our growth will be somewhat diminished.”
This line of thought has enormous implications for likely future economic growth and long-term corporate profits. Eventually, the market will be valued around this new normal.
Why we have not invested the entire 3.7 trillion into creating jobs is just beyond me. Congress just doesn't get it. Now there wont be another large chunk of money to create jobs later, they blew there wad on foolishness and we are both broke and jobless.
Wakeup America, we have a lot of problems ahead. Our wonderful congress is just part of the problem.
This policy of trying to get the banks to lend more seemed silly to me from the beginning. In previous "normal" recessions we had the same problem of people and institutions not borrowing. A business will borrow to expand, an individual if they are confident they can cover their loan costs (job security). With unemployment rising and individuals tapped out simply supplying the banks with more liquidity will do nothing to increase loans.
What usually gets us out of this recession feed-back loop is confidence, both on the part of business and individuals, which, at the present time, is nowhere in site.
Our fiat is debt-money. To keep the money supply expanding there must be a lender and a borrower.
The lender part is the easier part. The Fed gives credits to banks at very low rates. The banks then can lend a far greater amount (fractional-reserve requirements) at higher rates. This is a deal that is hard to pass up. Lenders are willing as long as their interest covers defaults.
Borrowers must be willing and able to take on this debt.
The housing bubble was the last gasp in the effort to get private parties to borrow. Even with negative real rates, to keep the money supply growing the unqualified had to be brought in through liar loans and collateral requirements were discarded through 100% (or greater) loans and neg-am provisions.
Private lending has been played out. The only viable borrower left is the Federal Government. As Private borrowing falls, the Federal Deficit must rise exponentially to compensate. The degree to which this must happen will be destructive to the dollar and the private sector.
The alternative is deflation. Whereas Fed-Era policies have always favored the debtor, deflation favors the saver. Policy makers have demonstrated that they would sooner "Drop Money From Helicopters" than let this happen.
But a capital society that is private in its enterprise and property will sell what they have produced and a capitalist society when free in their enterprise will work out the business until their business work out for them.
Because the Chinese will now run the welfare state. Now the Democratic party will wake up and realize that they just sold their power base to them.
Totally agree that the consumer gets it and DC doesn't. The thing with DC is power, and debt equals power for them.
Gem Hudson said, "He who has the gold makes the rules."
Well, start getting some gold and savings and getting out of debt.
Grains, pharmacueticals, coal, servers to name a few.
There are things to sell, but it will not be easy and we will have
competition. This will make us stronger......eventually.
On Apr 21 08:55 AM manya05 wrote:
> As morph366 quoted from the article "The nation does not need more
> debt but rather more income", I agree, and is very true. But how?
> The US economy, for years was seen as the most adaptable in the world,
> it "adapted" by abandoning and throwing away entire industrial sectors...with
> it, you threw away infrastructure, and more importantly, know-how.
> What of our new know-how can be sold in large quantities overseas?
> There lies the problem, what can we sell? software? India does it
> better and cheaper. Financial services? forget it, Wall Street lost
> its most important asset, trust, nobody will buy from us again. Internet?
> it is a commodity now, everyone can put together a good website.
> Biotech? to whom? most of the sick people in the world are also poor.
> Entertainment? yes, but we cannot all work for Hollywood. Of course
> we still have strong sectors, but USA Corp. in a global stage, is
> not very diversified, and certainly does not have a good value/cost
> competitive edge when compared with emerging economies. I think the
> US economy is sitting on a tight spot right now, let's see how we
> can wiggle out of it...not an easy task.
How I love it when the clueless pontificate about things others
will have to do. New alternative energy sources and the accompanying assets are not just sitting there to added to the economy. i.e. - solar has been around for years....total sum added to the world's electric grid......less than 1%, but lets throw $$$$ at it.
Do not get me wrong, I would love to see more and more sources of energy, but as an entreprenuer; I know these things take time......
... unfortuneatly not in a two-year election cycle....... therefore most
politicians are just blowing smoke.
On Apr 21 09:51 AM manya05 wrote:
> To the point of doubleguns and to expand on my own post. Since we
> have thrown so much money at the banks black hole with nothing to
> show for ("the financial sector did not collapse!" the "stress tests"
> will show it), now we do not have ammunition left to really "invest"
> in retooling our economy to produce new things of value that we can
> export. Look at the "smart grid" initiative, it is a very good start,
> that is an industry where change is needed, we can create new technologies
> that we can then export (besides making our own grid better), and
> create lots of jobs in the process. But the amount of money being
> put there is peanuts! ridiculously puny compared to the bailouts,
> and when it comes to re-industrialization, it is a flash in the pan.
> What opportunity to do the right thing that we are wasting!
The place to put 'any' investable cash; is in debt.
Get in line and receive the payments from everyone trying to pay down debt.
Disclosurers: (ACG), (PTY), (PSY).
On Apr 21 10:07 AM Allan Frain wrote:
> Put another way--
>
> Our fiat is debt-money. To keep the money supply expanding there
> must be a lender and a borrower.
>
> The lender part is the easier part. The Fed gives credits to banks
> at very low rates. The banks then can lend a far greater amount (fractional-reserve
> requirements) at higher rates. This is a deal that is hard to pass
> up. Lenders are willing as long as their interest covers defaults.
>
>
> Borrowers must be willing and able to take on this debt.
>
> The housing bubble was the last gasp in the effort to get private
> parties to borrow. Even with negative real rates, to keep the money
> supply growing the unqualified had to be brought in through liar
> loans and collateral requirements were discarded through 100% (or
> greater) loans and neg-am provisions.
>
> Private lending has been played out. The only viable borrower left
> is the Federal Government. As Private borrowing falls, the Federal
> Deficit must rise exponentially to compensate. The degree to which
> this must happen will be destructive to the dollar and the private
> sector.
>
> The alternative is deflation. Whereas Fed-Era policies have always
> favored the debtor, deflation favors the saver. Policy makers have
> demonstrated that they would sooner "Drop Money From Helicopters"
> than let this happen.
The family income figures don't mention that couples normally work now, a shift from several decades ago where one earner predominated. I don't think we can add our kids working for family income to make up for the accelerating decline, yet.
As doubleguns wrote, the entire 3.7 trillion should have gone for jobs, or at least relief for normal citizens. Blowing "the wad on foolishness leaves us broke and jobless." Arkansas Angie could have had solvent customers.
I would argue that instead of printing more money for the current population, there is money already "out there" (X-files pun intended) in terms of trillion of US dollars in Asia and the Middle East. So as a modest proposal, Offer a special route to US Citizenship (via visa's that vest after 10 years for American Citizenship). Imagine if a million individuals, enterpreneurs wanting to contribute to the American Experience are allowed to "buy in" to the US by providing a check for a $1,000,000? Such a quick hit generates a trillion dollar shot (not an increase in taxes, nor rolling printing presses) that would dwarf the trillions in debt (Fed or Federal programs) and would provide real cash and real people to go filling up the empty homes and condo's across the country. It would sweep substantially away many of the empty or under forclosure home too and generate further spending by those families along with increases in liquidity at home for financial institutions and local-state governments.
The fact of the matter is America is the "ultimate gated global community" in terms of people trying to get in. These individuals are talented, skilled, innovators and risk takes. These affluent "global citizens" would be repatriating US dollars that are being funneled out of the country either through oil transfers to the middle east or through the Wal-mart effect on industry offshoing jobs or through major corporations avoiding taxing. Trillions are sitting in the sidelines in Asia (China & India) or the Middle East and even in Russia (the recent oil boom and gas shipments to EU).
Fill the empty homes, refund the banks and financial institutions, and get the economy back on track through high income, high talented, risk taking, willing supporters of American values who want to the US. Give the 1,000,000 Squared plan a chance to work.
Borrowing and consuming need not cease, instant gratification should be indulged with no thought for consequences and frugality, self control over material appetites and producing honest value for others were mere relics of the bad old, pre-Wand, days, the elites taught through their Accolytes: the Media and Hollywood celebrities.
The Sorcerers would take care of all things for all people for all time. All the Sorcerers really wanted in return was power, obedience and money and the Wand would always be at the service of the people.
It turns out , now, that there was no Wand; just the narcotic smoke and hypnotizing lights. Now the table is bare , the lean years are back and debts, like locusts , swarm all around. The elites, however, still have power and money and in return for continued , indeed abject, obedience are promising an ever bigger and more potent Wand after this regrettable and so brief "episode" of that one slight lean year. Go back to consuming, borrowing and believing us, they say and the magic will , of course, return.
Anyway ... the banks get money from me in fees and more fees and ... of late thru my taxes and the bailout.
Remember the movie "Beetlejuice?" The government is like Beetlejuice. Beetlejuice will tell you he has the solution to your problem, but all he does is create bigger problems. Like the old woman said, "you don't want his help!" At what point will people begin to realize this?
This whole banking industry swindle is the latest in a series of orchestrated moves to kill the middle class and keep all the money at the top, the aforementioned boot being on the necks of the working class, who are us.
I have a small business-I fix and sell bicycles. I provide an honest value for money, selling a product and service that is good for people and the economy. Running it out of the shop in my yard, I am what America was fifty years ago. Before Wal-Mart, before the glamorization of living beyond your means and living in debt to the banks till you die. My depression era grandparents were so proud of this initiative.
Now America's biggest business is the financial sector. Selling money to each other? Please! How on earth can you just keep recycling debt, over and over, then selling the debt as an asset, then being allowed to write it down when it can no longer be serviced?
I know I'm a n00b on this forum, and my financial knowledge is limited. However I also know that if I grossly mismanage my business I go under.
So, these bankers have grossly mismanaged their business, to the point that it is damaging our whole country's economy. Yet only a token few get slapped on the wrist-most of them still pocket millions in taxpayer funded bonuses!
Like I said, my knowledge of finances is limited, but God damnit, I know when someone's pissed on my boots and told me it's a rain storm. We are in a depression. I see it every day.
When the government realizes, as now, finally, people are realizing, that more debt is not the way-only then will we truly be on the road to recovery. When the money is tied up in industry, manufacturing, education and fostering our vast talent pool. You know, the things that keep a healthy, vibrant middle class with a low enough barrier of entry that average, hard working folks can attain it. Versus now, when it's all tied up in impossibly complex financial instruments that will not and cannot ever be made into something of value. No good has or will come of our current path, not really.
Great Comments
Great Hatred of the Cancer of Credit
Great Recognition that only Savings will Save the USA
Great Productivity will follow future Salvation from Greater Savings
Great Bond Interest Rates coming for Savers
Great Distrust of Equities is needed now
Great Recovery ... when Morality informs Policy
Great Corporate Profits only when Moral Leadership Returns
Friar Hilarius
It is impt to keep in mind that the graphs show household income. since we used tp have only one wage earner in the family and now we have two it effectively means the wages were 1/2 to just keep even.
On Apr 21 04:53 PM Cetin Hakimoglu wrote:
> Savers will never be rewarded. That's just the way things are. <br/>
No truer words have ever been spoken on this site. Yet we tax income and subsidize debt. Does this make any fing sense? So do I work harder and pay more taxes or do i take out a big loan knowing that the inevitable future inflation will knock my payments down substantially and if all goes to hell in a handbasket I can walk away and perhaps get some form of government cramdown? This is the nation we have become and do we honestly wonder how we got here.
Please, keep the change.
Atlasman
Some house bargains are available in this deflation
Savers will benefit
Friar Hilarius
Savers will bever be rewarded ?
Savers will never be rewarded ?
We need to be able to edit our posts
On Apr 21 09:00 AM doubleguns wrote:
> No jobs = no income.
>
> Why we have not invested the entire 3.7 trillion into creating jobs
> is just beyond me. Congress just doesn't get it. Now there wont be
> another large chunk of money to create jobs later, they blew there
> wad on foolishness and we are both broke and jobless.
>
> Wakeup America, we have a lot of problems ahead. Our wonderful congress
> is just part of the problem.
I keep on reading this!
If these congress critics think that they are so much smarter, why don´t they get on their feet and create value for Joe sixpack voter?
I mean we all should stop to look at good politics as something that we are entitled to.
In times like these we are entitled to nothing but to roll up our sleevs, take out the crooks and to stop blaming others. (At least that´s what a is made democracy for).
As long as this is not going to happen exactly nothing will change.