Tuesday, April 7, 2009

Consumers Borrow Less; Credit Crunch or On Purpose?

When I was leaving work today there was a ear shattering roar and the car was vibrating. I looked up to see 4 F-15 Eagles screaming by on their way to do a flyover at Fenway Park for the Boston Red Sox home opening game. A little scary at first, then very exciting to see those birds soar by!

Create Your Own Currency
The USA Today had an interesting piece up that covered the little known (at least by me) practice of several communities printing their own "currency" which it is said helps keep spending locally centered. I was further surprised to find out the largest agreement of this type is centered in Massachusetts:
Communities print their own currency to keep cash flowing
A small but growing number of cash-strapped communities are printing their own money.
Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.
The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.
Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.
Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash.

To be honest I am not sure what the point of this is. I imagine there must be some benefit, or nobody would do it. Still, very interesting.

So how about EconomicDisconnect Bucks?

Canada Juggling "Mark to Market" Reform
It was no surprise that the US regulators caved in to banking interests and basically scrapped the "mark to market" accounting rules set in place after the Enron debacle. Estimates vary from having no material change to balance sheet reporting to raising bank earnings estimates up to 20% on the upside. I would offer that if this change was not going to be very beneficial to the banks, there would not have been so much whining about it. Certainly the banking sector thinks it will help, and those guys know their stuff.

Canada seems to be leaning more towards the European model of keeping mark to market type rules in place. The tone of this article does imply there could be some movement:
Canada to split with U.S. on mark-to-market rule
Bitter disappointment expected for banks on mark-to-market decision
Canada is set to split with the United States over its response to the financial crisis and reject a move to let banks duck losses by inflating the value of troubled assets, according to people familiar with the matter.
The country's top accounting watchdog reached the decision during a closed-door board meeting on Monday, giving a thumbs-down for now to a U.S. move to loosen accounting standards.
The decision, due to be announced this week, is a big blow to Bay Street and means Canadian companies will have to record hits on distressed assets that are hard to sell.
Shares in Canadian banks rallied last week along with Wall Street after Washington's politically charged decision to ease so-called mark-to-market rules that experts said could goose bank profits by 20%.Bay Street executives had lobbied for Canadian authorities to follow the American lead, and will be bitterly disappointed by the decision to break with Washington and align with Europe.
Banks are expected to try to overturn the decision and seek political intervention to persuade the Canadian Accounting Standards Board to change course.
The pressure will likely begin this week when chief executives of top banks start a series of meetings on the fallout from the financial crisis with Jim Flaherty, the Finance Minister.
The American decision was blasted by the European industry as an example of "political interference [which] will only serve to further destabilize confidence in the system."
The U.S. changes will make it easier for companies to price assets using their own internal models rather than market prices, and allow them to recognize only part of any losses in their income statements.

While the Canadian banking sector still hopes to get this changed, at least for now the answer is "NO"!

Please notice the quote from a European source "political interference [which] will only serve to further destabilize confidence in the system". It is clear that the banks do not hold as much sway in Canada and Europe as they do here in the US halls of government. Elected officials from both parties were running around with energy to get this accounting change pushed through. Kind of makes you feel bad for the northern neighbors that had to take their chances with common sense being applied.

Consumers Borrow Less; Credit Crunch or On Purpose?
The data point of the day was a reported drop in consumer borrowing much bigger than expected. Here are the details:
Consumer borrowing dips more than expected in Feb.
Fed: consumer borrowing plunged by $7.5 billion in February on record drop in credit card use
WASHINGTON (AP) -- Consumer borrowing plunged more than expected in February as Americans cut back their use of credit cards by a record amount.
The Federal Reserve said Tuesday that consumer borrowing dropped at an annual rate of $7.48 billion in February, or 3.5 percent, from January. Wall Street economists expected borrowing to slide by only $1 billion, according to a survey by Thomson Reuters.
The decline was led by a record drop in borrowing on credit cards, which fell at an annual rate of $7.8 billion, or 9.7 percent. That is the sharpest drop in dollar terms since federal records began in 1968, and the steepest percentage fall since 1978.
"Consumers don't want to borrow as much, they want to build up their savings," said Zach Pandl, an economist at Nomura Securities International. "People are adjusting to new spending habits."

So it seems the "monthly payment" consumer finally hit the brake pedal. Not mashed it mind you, just tapped it a bit.

This information will most certainly engender quite a few stories from the usual economists about "The Paradox of Thrift". Boiled down it argues that in a tough economic spot, people will pull back on purchases (no way!) but this very pull back will only hurt those foolish enough to do it through more economic contraction. Of course right after that section many will trot out the old "government must fill in the gap" line.

I would like to focus on the possible causes of the borrowing pullback. It cuts to the very core of the debate whether this pull back was caused by a "credit crunch" or if the spending slowdown was done on purpose by the public. This is a key issue.

Much of the argument for aggressive bailout packages and acronyms of all sorts was the need to get lending started again. The idea was that there is massive credit demand, but limited desire (and/or ability) of the banks to extend this credit. If indeed there is a major shift away from ruinous debt accumulation by the public much of the arguments for banking support fall empty.

While I think a final call on this debate will have to wait for several more months of data points to see any real trend, I can offer an anecdote from my own experience that just happened today. My wife has a vacation resort linked credit card through a major bank. She uses this card for various purchases and she builds up "points" that can be exchanged for resort activities or room upgrades. As you need at least one credit card to do most anything these days, it seems like a good rewards program for us.

The usual rate on the card is 4.3% annually. My wife just got a letter today informing her that the new rate is going up to 11.4%!!!! My wife has not missed a payment ever on any credit card. The balance carried is pretty small. There is no material reason for this change other than the major bank issuing the card needs more cash.

And that does it for us. Consider the massive taxpayer bailouts, the FED funds rate so low that banks can book enormous gains by spreads on loans, a scam of a PPIP program meant to transfer losses to the taxpayer, and the fact that the FDIC allowed their fees to go unpaid by member banks. All of this is still not enough? The banks feel that sticking borrowers with almost triple interest rates is now their right as well? How many ways can you get bilked by one industry?

Our reason for less credit card borrowing will be simple: We refuse to pay higher interest rates on credit in yet another extension of a bailout due to deadbeat borrowers. That is what is going on here. In order to make more money the banks are going to gouge the better personal credit managers to pay for the losses from the worse ones.

You can count us out. We will be closing the account and further will now forgo any credit card purchases as I am sure all issuers will be doing the same thing. This is obscene. The law of unintended consequence guaranteed that if the US government got involved in bank bailouts, the banks would take full advantage and now they are even pressing their luck by raising borrowing costs when the WHOLE POINT of intervention was to avoid that very thing. I get to pay for the banking losses by my taxes and then I get to pay higher borrowing costs while the banks enjoy record spreads via FED intervention?

Vote with you feet. Say no to double bailouts of the banks by paying cash, or whatever your local currency may be, and leaving the credit card balance at ZERO.

Have a good night.


Anonymous said...


I dumped my AMEX card after having it for over 20 years, I always paid mine off in full every month. I called them up and said you are getting bailout money and that doesn't fly with me, close my account thank you.


GawainsGhost said...

Yeah, I'm with you GYC. Zero balance on the credit card, pay it off every month. I only keep it for emergencies, as when I'm in another city and need to book a room at a hotel.

Otherwise, I use my bank card. It's the same as a credit card, except the balance is what I deposit and there is no interest.

I keep a Visa card for those unlikely purchases, in the event of an emergency, that cost more than I have on deposit in my bank card. Of course, I have more than enough to cover those costs in my checking account, so really the point it moot.