Record Consumer Credit Numbers

The Federal Reserve has reported earlier today that consumer credit had the largest single month increase in almost a decade and seventh consecutive monthly increase in recent history.

When you examine the causes of this decade’s recession, a myriad of events come up, like subprime mortgages, overleveraged ABS exposure by banks, etc. The primary underlyer in any of these issues was borrowing and easy credit.

(A tweet of mine was

showing an example of easy credit.)

As the economy has been recovering, it has been fueled by near zero prime rates and a general ease for consumers to borrow. This is one of the main reasons that the economy crashed in 2007, because there was too much borrowing and the U.S. consumer was living beyond his/her means.

The U.S. is also lucky that Europe is in the midst of a debt crunch which is keeping the Dollar strong as the Euro is equally as weak. It is painful imagining what the USD/EUR would look like if the Eurozone countries were on stable economic ground and did not have the debt problems that we constantly hear about.

The consumer credit numbers released today are making me think that there will be a repeat of what happened five years ago, but this time the normal bag of tricks from the Fed is not available to support a phony economy as interest rates are already at their bottom, the money supply is already incredibly diluted to cause a significant effect from further easing. What I am wondering is, what major event will set off another major downturn, much like the collapse of the Bear Stearns hedge funds set off the beginning of the 2007 recession and when this will happen.

What will it take for consumers to control their urge to borrow? While I realize that there are people out there that do believe in saving and making sure that their personal balance sheet is not significantly leveraged, the numbers point out that the majority of people do take advantage of the credit that is available to them, simply because they can.

 
Best Response

Yuriy, almost all debt problems throughout history have been caused by manipulated artificially low interest rates.

This is a given.

"As the economy has been recovering, it has been fueled by near zero prime rates and a general ease for consumers to borrow. This is one of the main reasons that the economy crashed in 2007, because there was too much borrowing and the U.S. consumer was living beyond his/her means."

In reality this is simply a symptom or effect of the main cause.

The main cause of ultra low interests and too much borrowing is the actual construct of the IMS.

This was all predicted in the late 50's and early 60s. Once you understand how the IMS operates then "predicting" outcomes becomes fairly easy.

The difficult part is timing, the easy part is already knowing what is going to happen because there is only one logical outcome.

The timing becomes easier once the terminus event approaches (within 6 months to 1 year).

Political processes must be taken into consideration as well in the analysis.

The one who does not fall, does not stand up
 

The consumer credit numbers released today are making me think that there will be a repeat of what happened five years ago, but this time the normal bag of tricks from the Fed is not available to support a phony economy as interest rates are already at their bottom, the money supply is already incredibly diluted to cause a significant effect from further easing. What I am wondering is, what major event will set off another major downturn, much like the collapse of the Bear Stearns hedge funds set off the beginning of the 2007 recession and when this will happen. quote]

You are right "the normal bag of tricks for the Fed do not exist to them currently"

Thats why they have new ones just like they did in 2008. Before 2008 it was illegal for the Fed to purchase MBS but they changed that quick.

New ways will be created, I can name a few.

1) They will change the tax structure of Treasuries. Say 90 to 100% tax free.

2) They are already planning to introduce Treasury FRNs (floating rate notes) to placate foreign buyers in the event that "interest rates rise" which they cant above 3%. (another discussion).

3) Would be this playbook, Monetary Policy in Over-indebted Economies. http://www.hkimr.org/cms/upload/seminar_app/sem_paper_0_424_Paper_2011%…

It is already all planned out, but that doesnt mean they will be successful in their plan when the next external shock to the system occurs that I have already identified.

Just like they knew back in 05/06 what was going to happen, they were prepared but powerless to stop it because of the political process.

The one who does not fall, does not stand up
 

Busy now but I'm going to come back to my boy Yuriy's thread in awhile and drop some consumer credit knowledge on your collective grills.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

Unfortunately people tend to naturally live a step above their means when given the chance. I got a teller job to pay for school and you see the bottom feeders in that job. It is incredible to witness the stupidity that some people have with their money. I regularly talk with our lenders about how fucked Vancouver is when rates go up. O well at least it seams that the majority of this blog will see the next (inevitable) crunch coming and hell, wont it be a life changer of a shorting opportunity;p

 

Alright, I am going to address a couple of things and this might be rambling but you'll live.

1) Easy Credit - I fucking love it when I see documentaries where people rail on consumer credit firms for offering credit to people that are on disability or unemployed or under 20 or any other nonsensical reason they shouldn't get credit. There are a couple of things that go into this and I will enumerate them below.

a) Fair Lending / Card Act(s) - Basically these ripped the tits off the industry. It prevented consumer credit firms from being able to 'segment' (meaning break up the population by characteristics) on things like age and shit like that. At first glance that seems fair as fuck right? "Just because I'm 20 doesn't mean I can't have good credit' which is true. The problem is, there is no way to ascertain the value (true value) of that person beyond their FICO. There are other things but, essentially, FICO is pretty much all you got. This isn't a mortgage. You don't have to fax in 47 documents with your taint print on them to get money. That would be prohibitively expensive for CC firms.

b) Income Verification - Before any of you flip shit and tell me how AMEX tried to give you a black card in UG which is terrible because you didn't have a job etc etc I am going to remind you of one little tiny fact. You self report your income. Housewives, in a poll, regularly report their husband's income as their own. This means that when you apply for some form of credit, you get people who have 780 FICO scores and 150k in income who, actually, don't have jobs (well they work at home but you know what I mean) and have a high FICO because they have a mortgage and a cell phone bill in their name, both of which are paid by their husband, giggalo, whatever.

2) Recent increase in Consumer Credit - There are, again, two things driving this.

a) Regulation by the Government - All of you liberals that think you're smarter than me just chill the fuck out for a second and listen. The government is doing a really really thorough job of trying to hone in on products or services offered by CC companies that it deems to be unfair or unnecessarily complicated. On the surface, this seems fair. Some mouth breathing broom pusher can't be expected to read a 14 page product disclosure and understand it. The problem is, this leads to a decrease in the overall revenue for a lot of CC firms. These aforementioned products were (and in some cases, still are) a huge money maker. This revenue has to be found/picked up elsewhere which is why you've seen a huge push to get new accounts on the books at a lot of different CC firms.

b) Pent up demand - this one is a little hazy. So we saw a pretty significant drop in the amount of debt people carried, the number of cards they had, etc. throughout the last recession/depression/clusterfuck. Now, imagine those people that were financially responsible as shit for the last 3 years getting a credit offer in the mail/email that is just flat out awesome. They are much more inclined to take (or so the thinking goes) because they 'have their shit under control now'. No they fucking don't. But, the combination of aggressive attempts to book more customers and pent up demand leads to more people accepting offers.

Now, before any of you start giving me some anecdotal bullshit about how your cousin at Penn State got some awesome credit card offer, you need to realize something. Almost every single person on this site and 97.9% of the people you probably know are not subprime credit customers. You are what is considered Prime or Super Prime. This means that you are the exception to the rule.

I'm happy to answer some questions below just as long as, you know, it won't get me fired.

 

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If I had asked people what they wanted, they would have said faster horses - Henry Ford

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