| Is the Consumer Economy Dead? |
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| Thursday, 17 September 2009 00:13 | |
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While there are signs that the global economic meltdown has hit bottom with a few faint glimmers of recovery on the horizon, the rules have already changed. Let's do a quick review the events of the past year. First there was the government takeover of Fannie Mae and Freddie Mac back in September, followed closely by the collapse of Lehman Brothers. That was enough to touch off a panic that ricocheted around the globe. Next came government intervention and stimulus packages that poured vast sums of money into the craters of the financial system. But the over borrowing and loose money that had fueled the 80s boom has dried up. The global economy had been feeding off that expanding credit, and now cheap credit is gone, and so is the era of reckless consumer spending. There will be a lot less willingness to take risks for at least the next decade or two and certainly less access to credit. All those consumers we wrote about in our reportConsumer Debt in the U.S. are now socking their money away or paying down debt. That consumers are reluctant to spend what they don't have is evident in the numbers. According to recent 2009 reports from the Fed's, consumer credit fell at an annual rate of 5.2% between April and June, after falling by just 3.6% between January and March. Revolving lines of credit, including credit cards were also decreasing -- 8.9% down in the first quarter and 8.2% in the second quarter. Rising unemployment rates play a role in the decline in spending and even the banks have become tight-fisted as they try to build up reserves. If you need a loan, you're probably out of luck. Many U.S. banks don't have the ability to lend, including the more than 400 banks that are on a "problem list" and at risk of insolvency. Eighty-one banks and thrifts have already been shut down and the FDIC notes that escalating loan losses has depleted bank reserves with the ratio of reserves to bad loans at 63.5%, the worst since 1991 during the savings and loan debacle. Part of the problem has been the way banks have handled their loans. As far back as the 1980s, banks have kept loans off their balance sheets by selling them into a secondary market where they were bundled and sold to investors as securities. Last month we wrote about this inSecuritization: The Good the Bad and the Ugly. All manner of debt was packaged and sold, from home mortgages and car loans, to student loans and credit cards. This securitization process accomplished two things, it opened the floodgates of credit to consumers and businesses, and it kept loan liabilities off their balance sheets, allowing them to lend even more. But today, with a lingering lack of trust in Wall Street, risk-adverse investors have all but killed the concept of securitized debt. Until something happens to make securitization acceptable again, the banks will be reluctant to start lending because those loans will have to sit on their books. And something is happening. The Feds have come to the rescue and offered to lend money to investors who are willing to buy lower-risk pools of loans, called asset-backed securities. (See our glossary of terms for the definition ofAsset-Backed Securities. These federally funded loan offers have been extended clear into mid-2010, which means even the Fed thinks it's going to be a long time before there will be a functioning securitization market again with a solid foundation for consumer lending. It appears that a new world order for finance is in the making and it's begun with more government involvement and new stricter regulations that are replacing the former trust in self-regulated markets. It might bring things back into balance eventually, but in the meantime, consumers are going to stay hunkered down on the sidelines. Those credit default swaps that caused the whole economy to crater ... They’re back! |
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