Tuesday, May 3, 2011

A quick look at consumer leverage

Two posts in the blogosphere caught my eye this morning - both focusing on consumer leverage.

Calculated Risk points us to a Federal Reserve press release noting the "April 2011 Senior Loan Officer Opinion Survey." Opinions are good, but the release also seems to indicate there is data showing banks are easing standards and terms on loans for both businesses and consumers. Especially consumers:
"...And the net fraction of banks that reported having become more willing to make consumer installment loans rose to its highest level since the first half of 1994."
The whole mortgage-backed thing is kind of in the toilet right now, along with home prices, but this info from the Fed indicates banks are willing to lend to consumers without requiring a home to serve as collateral for the loan.

My initial response was cautious optimism. Perhaps the investment the nation  had made in the banks (via TARP, etc.) was finally paying off with bankers now investing in consumers.

Then I saw this post from Paul Krugman. And my optimism was shattered once again. He's got a chart that shows a sharp upward shift in consumer leverage starting in 2001. As corporations were deleveraging, consumers were leveraging up. According to Krugman, "it's now standard to focus on household leverage as a key part of what went wrong in 2008."

So it seems like the opportunity for consumers to leverage up once again is a double-edged sword. Do we want consumers to become even more indebted and leveraged? Seems not the way to go. The answer seems to lie in boosting salaries of American consumers, not just their ability to borrow. Here's hoping we see wage increases in the recovery we're supposed to be experiencing. But that may prompt the Fed to issue other releases, warning of the dangers of inflationary wage increases...

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