Banks And Consumers Say No to More Debt

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.

Comments

[Leftfield:]

Other people's money is what politicians throw around. Their trying to keep failed systems alive with more of the same, debt that we and our kids will be expected to pay. As others have pointed out, with what jobs and what industries?

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.

Apr 21 11:10 AM

[1,000,000 S...:]

While I agree with the conclusions in this article, part of the way to spend more is to have more people spending (not just the same people spending less right? paying down their debt that while good for liquidity is not good for spending).

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.

Apr 21 12:05 PM

[gordon:]

You failed to mention the FINANCIAL MEDIA, especially CNBC for promoting this "banks need to lend, consumers need to spend" theory. These are the same corrupt salesmen who over the last 10 years heralded the "lack of wage inflation a boom for stock prices", loving their boot on the neck of the wage-earners (as opposed to cap gains). Why isn't someone requiring or demanding that banks raise yields on SAVINGS? Where is this author and others on tv asking for this, since wages can't go up now? How much spread do they need? What about the forgotten "common good" principle?

Apr 21 12:51 PM

[The Hoss:]

Good Post. Two questions. What would happen if we all had no debt and no need to borrow, how would financial institutions make money? Where would would invest our savings?

Apr 21 01:16 PM

[Leftfield:]

Um, Cetin, you have been touting the jobless recovery we're going to have as no problem in many of your comments. Here you say "High debt levels are sustainable because household incomes and wages will continue to rise in the coming years as the economy recovers." But, wages have been stagnant for nearly 40 years. And you say this will be a jobless recover, no problem. Please explain.

Apr 21 02:04 PM

[User 353732:]

The ruling elite in the US very artfully and successfully managed to convince the ordinary American that , by the Sorcerer's Wand of the ruling elite, the ancient and rhythmic cycle of "7 fat years and 7 lean years" had been transmutated to "13 fat years and 1 just slightly lean year". The people were only too eager to believe the flashing lights, the colored smoke and the shimmering vision of the groaning table heaped with the free lunch.
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.

Apr 21 02:23 PM

[ArkansasAngie:]

The Hoss -- I have no debt and I don't need to borrow. Ask my brothers -- I got out in November of 2007 -- made them get the family out too. Have they taken me to dinner yet and said thanks? I digress.

Anyway ... the banks get money from me in fees and more fees and ... of late thru my taxes and the bailout.

Apr 21 03:25 PM

[Gedankonomist:]

If government were it's proper Constitutional size, it would be 10% it's current size. Can you imagine the buzzing activity that would result if government took a hike and stopped using your tax money to create problems?

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?

Apr 21 03:49 PM

[gordon:]

Nobody has answered my question, when will someone demand that savers be rewarded? The criminals' con-job is to force savers to take risk because of zero (or negative) yields, & this should be criminal. This author won't stick his neck out I bet. What you think the average saver goes into corporates or munis? They are also all overvalued, at 10% premiums to par. No. The average working Joe is doomed in this country. Obama is a facilitator, owned by Goldman Sachs. Status quo continues...

Apr 21 04:04 PM

[Bolton Peck:]

I heard an interesting statistic the other day. 25 years ago, one percent of our population had nine percent of the wealth. Now that one percent of the population has TWENTY THREE percent of the wealth.

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.

Apr 21 04:45 PM

[Friar Hilarius:]

Great Charts
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

Apr 21 07:06 PM

[dcb:]

Trader mark has a good article today comparing our banking system to what happens in the third world.

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.

Apr 21 09:41 PM

[dcb:]

go max out your credit cards, and get a mortgage too big for you and see how you will end up.


On Apr 21 04:53 PM Cetin Hakimoglu wrote:

> Savers will never be rewarded. That's just the way things are. <br/>

Apr 21 09:42 PM

[atlasman:]

'The nation does not need more debt but rather more income."

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

Apr 21 10:48 PM

[Friar Hilarius:]

Savers will never be rewarded

Some house bargains are available in this deflation

Savers will benefit

Friar Hilarius

Apr 22 12:54 AM

[Friar Hilarius:]

There should, of course, have been a question mark after the first sentence

Savers will bever be rewarded ?

Apr 22 12:55 AM

[Friar Hilarius:]

Typo correction

Savers will never be rewarded ?

We need to be able to edit our posts

Apr 22 12:56 AM

[alaskaeagle:]

Congress is the problem! We have stupid people getting elected and re-elected. They naturally rise to the top where they make stupid laws. There should be term limits to avoid stupid people from rising to the top. Seniority in congress is just as bad as seniority in unions. We need a constitutional amendment to limit the terms of Congress.


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.

Apr 22 02:03 AM

[steve graves:]

You see, it's incredibly straightforward, essentially irrefutable - not to mention scary - articles like this which drew me to Seeking Alpha in the first place. Bill you're brilliant, and a credit to this site. Keep it up.

Apr 22 04:50 AM

[silentobserver:]

Congress is 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.

Apr 22 05:18 AM