Consumer credit: 2007 versus 2008 and TALF

Friday, March 6, 2009

The Fed announced the start date (March 17, 2009) of its newest shining white knight policy measure, the Term Asset-Backed Securities Loan Facility (TALF). In its original form, TALF is designed to support consumer and small business lending by restoring functionality to the securities markets backed by those loans.

Initially, the program will extend up to $200 billion in lending against eligible collateral (securities backed by consumer and small business loans). As warranted, the program is expected to grow in both size and scope, with up to $1 trillion in lending and against a wider range of ABS collateral.

This got me thinking about consumer credit, which was reported today to have increased at an annual rate of 3/4 percent in January 2009. Total consumer credit - credit card loans, other consumer loans, auto loans, and student loans - slowed substantially in 2008.

If that slowdown is due primarily to tight credit standards, then it seems that the TALF program has a very good chance of successfully "assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy" (from the Fed's TALF announcement). If it does not, well then no matter how well the ABS market functions, spending and credit demand is likely to remain anemic as the economy continues its decline.

The chart illustrates the annual change in total consumer credit spanning the years 2003-2008. It shows that new consumer credit in 2008 slowed substantially to just $46 billion, down sharply from its 2003-2007 average, $110 billion.

And across the different types of credit, both securitized lending and financial institution lending (e.g., GMAC) contracted.

The chart (left) illustrates the flow of consumer credit by type in 2007 and 2008. Securitized lending took a U-turn, $22 billion in 2007 to -$28 billion in 2008, and lending by finance companies turned negative as well, -$7 billion in 2008.

The data seem to suggest that tight credit conditions are the primary drag on consumer credit; and therefore, spending is collapsing. But I can't get the Federal Reserve Senior Loan Officer Survey results out of my head.

The chart (right) illustrates the fourth quarter 2008 results of the Federal Reserve’s Senior Loan Officer survey; it produces the following results: the net-percentage of officers that report having increased (reduced) lending standards since the third quarter of 2008, and the net-percentage of officers that report having seen stronger (weaker) demand for lending over that same period.

According to the survey, lending standards have tightened substantially. But contemporaneously, consumer demand for loanable funds (credit card and other consumer loans) has decreased precipitously. Therefore, the contraction in consumer credit is likely a combination of both: tight standards and anemic demand, where demand is falling amid rising unemployment and sharp wealth declines. In short, consumers are saving rather than borrowing against future income for current consumption.

My point to this whole story is this: if the reduction in consumer credit is driven strongly by reduced demand (which one cannot tell in the data), then one questions the potential benefits of TALF in jump starting consumer and small business lending.

Rebecca Wilder


Smack MacDougal March 6, 2009 at 5:50 PM  

The crazed, unsustainable Consumer credit growth between 2003-2007 was a historic anomaly of epic proportion, all based on McMansionism.

Prices must adjust downward on thousands of things, including houses, to reflect the burst of this epic, unsustainable Consumer Debt Bubble.

Once again Bernanke proves himself to be wrong with a policy prescriptive, in this case, TALF.

Trying to offer more credit when Americans lack the cash flow from income to pay debt obligation is like offering to extend the bar tab of a penniless drunkard and then expecting him to pay it back later.

The economy is unsound structurally . Until the structure gets fixed built around Say's Law (supply from production makes its own demand), Americans shall continue to suffer.

Dinking around with interest rates and Quantitative Inflation (aka quantitative easing) prolongs the agony.

Yet these acts reveal the depth of incompetence of the American ruling elite -- from central bankers like Bernanke to incompetence like Obama and his band of clowns like Geithner.

It's time to push aside the Academician economists (all who know nothing) and the meddling Progressive collectivist bureaucrats.

We need authentic leadership from practical men who know money and economics (the science of exchange of one right of claim for another).

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