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Consumer Credit – Are We At it Again?

April 30, 2012

What the numbers tell us today (as illustrated in this graph) is that, as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble.  Moreover, at $2.495 trillion, outstanding consumer credit stands at 97% of its peak of $2.576 trillion in August of 2008.  Deleveraging, my friends, this is not.
(Dan Alpert’s Two Cents)

When economists and econ journalists chat about numbers like these, I’m often convinced they just don’t get it. When the markets crashed and the economy tanked, consumer credit froze solid for most Americans. Since that time, the conventional wisdom would have us believe that while consumers may have been completely irrational getting themselves neck-deep in debt prior to the crisis, once the handwriting was on the wall, household deleveraging took place in haste. Suddenly, American consumers came to their senses and starting trying to live within their means and pay off debt.

But what’s this? Now we see that consumers are once again accumulating debt, and at a rate rivaling the height of the bubble? Gee, it’s almost as if we’re not rational actors at all. But the conventional wisdom of recessions past would have you believe this is great news. This proves that the confidence of the American consumer (don’t forget: the only thing keeping us afloat) is back, baby!

Yeah.  I don’t buy that, either. A few points worth considering:

  1. This return to heavier debt load comes at a time when real wages are on the decline, and so the income/expense hole for many workers has become wider
  2. The CFPB reports that student loan debt alone will surpass $1 trillion by the end of the year
  3. Since the housing crash, underwater homeowners with outstanding “equity lines of credit” are making payments on what amounts to unsecured loans – bringing unsecured consumer credit into the range of roughly $3 trillion

What does all this mean?

  1. American consumers could not afford the “American standard of living” prior to the crisis, but easy credit made it possible to pretend otherwise
  2. When credit froze, consumers had no choices other than to default  or deleverage
  3. The incredibly painful job market has led more Americans than ever to take on student debt, at a time of ever-increasing tuition costs
  4. For-profit colleges are the post-recession equivalent of predatory lenders
  5. Banks are now itching to restart the practices that made them  über-profitable during the bubble, so credit is now “loosening-up”
  6. Consumers, still lacking any appreciable savings, “rationally” choose  to re-up on credit now that it is (somewhat) available

Sadly,  although certain people and media outlets would say otherwise –  the consumer credit bubble didn’t grow simply out of Americans living beyond their means. (Living it up with $1000 iPads, if Rick Santorum is to be believed.) The truth is that banks made credit “easy” because they “needed” the business to deliver stockholder value (a story for another day.) Consumers took that bait because otherwise most of them couldn’t maintain a lifestyle on par with what they grew up accustomed to.

The great American dream of each generation exceeding their parents is clearly over. But Americans are loathe to give up the idea that they, at least, won’t slip backward. Never before in U.S. history have they even been asked to accept that idea. Today, there’s an entire political party devoted to forcing acceptance upon them. (You know, so the “job creators” can create “jobs”.)

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