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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: Dale Baker who wrote (129314)	1/26/2010 2:37:46 PM
From: Katelew	Read Replies (1) \| Respond to of 541786

So the collapse of consumer and business credit availability from the banks had nothing to do with the recession, it just magically occurred on its own lunar cycle or some such? That view is not supported by the facts I have seen. Can you explain in more detail how and why the consumer economy came to a halt and began to contract? In every recession, some thing or combination of things triggers a contraction of consumer spending. Typically it is inflation followed by higher interest rates. Rates keep clicking up until increasing numbers of people stop borrowing on credit cards or for mortgages. Remember the old phrase, "three steps and a stumble", meaning three consecutive increases in rates and the economy stumbles. This recession was a little different. We had inflation but not the accompanying rise in rates. It might have come, but the economy stumbled before the Fed. Reserve raised interest rates. The contraction of the economy started because price inflation crowded consumer budgets. The three most significant areas, I think, were rising energy costs, both home utility costs and gasoline prices which affected both the cost of driving and flying. Also the cost of food was rising meaningfully for the first time in decades, and medical costs were continuing their average 8-10 percent a year advance. Costs were rising in other important areas, too. Education costs had risen disproportionately for about ten years. Perhaps the main culprit was energy costs which exacerbate the cost of everything else. Much of the increase in corporate profits between 2001 and 2007 was increases in prices, not so much increases in units sold. So the country experienced inflation while at the same time wages were relatively stagnant. Something had to give. The consumer became increasingly disinclined to just slap it on a credit card or fund his purchases with home equity loans and/or many consumers reached the end of their credit limits in both categories. At this point there was nothing atypical about the process, imo. As always happens, banks and other consumers lending agencies such as GE credit or GMAC, who can see that the consumer is laboring, start to tighten credit a little in an effort to raise their own reserves, anticipating increased defaults. This crimps those people who are still willing to borrow, i.e. those who haven't reduced their spending voluntarily. But this is also typical. In other recessions, banks tightened credit as interest rates were rising because they knew that higher rates would bring about more consumer defaults. The consumer and the economy were contracting before the banking debacle happened, even though our brilliant economic forecasters were still predicting growth. But that's always the case. A recession is always well underway before economic forecasters pick up the scent. Credit never collapsed. Things were locked up for a short period as the banks quit lending to each other and fear reigned. But the Fed. Reserve did what it's designed for...instilled confidence by acting as guarantor. Credit was always available to credit worthy borrowers as were mortgages in all but those few counties where real estate values had become most skewed....a few counties in CA, FLA, AZ and Nevada. The whole thing is yet to shake out so I could be somewhat off in my interpretations. The banks definitely tried to shrink their exposure to the consumer in reaction to their own foolish losses in the derivatives markets. They reduced credit card limits and some like JPM increased required minimum monthly payments dramatically. The typical card offers such a the low life of balance transfer rates stopped or at least were reduced. These activities were probably more draconian than in previous recessions because the consumer had become more willing to load up his or her credit cards, but how much this type of stuff made the recession worse is yet to be analyzed. The main point I want to make is that demand for credit was already dropping before the debacle, and that afterwards there was plenty of credit available on attractive terms for creditworthy borrowers. This is how I saw and still see the cycle unfolding. The consumer led the way into recession, not the banks. Everyone pretty much played their traditional roles thus far.