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Credit Card Crunch?
Frankly, I am tired of this topic but every time I try to check the data - as best as I can - it doesn't seem to support the rhetoric we are hearing from people at the top [despite real problems blah, blah, blah]. Here's Paulson today:
At least some of the remainder [of the bailout money], Paulson said, should be used to reinvigorate the market for credit cards, student and auto loans -- which combined account for some 40 percent of consumer credit.
"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. (emphasis added)
I'll focus on credit cards. It is true that credit card offers, i.e. junk mail, is down:
...one billion fewer offers mailed during the course of the year. Households with incomes under $50,000 will receive about 700,000 fewer offers in 2008 compared to 2007. These households account for the majority of the cutback and clearly indicate a major change in strategy by card issuers.
"The souring economy and industry consolidation have driven volumes down to levels not seen since 2003 [Crisis! AT]" said Andrew Davidson, Vice President of Competitive Tracking Services for Synovate’s Financial Services Group. "Card issuers are taking a more cautious approach, with lower income and high risk households receiving fewer offers or no offers at all."
But even so:
Despite the decline in offers for new cards, US consumers still have access to an increasing amount of credit. Household credit lines across all cards edged up to an average of $27,626 per household (YTD 3Q 2008) from $26,902 in 2007 despite evidence that issuers are cutting credit lines on certain customers.
..."Much has been reported about issuers reducing credit lines for certain customers but this is not the case for the majority of people. Across the industry as a whole, we continue to see credit access and usage at record high levels" said Davidson.
By the way, after listening to Tyler and me debate this topic Bob Murphy and Megan McArdle decided to run some tests. So if you prefer your data by anecdote you can read Bob's results here and Megan's here. I am partial to Megan's hypothesis #5.
Posted by Alex Tabarrok on November 12, 2008 at 02:50 PM in Economics | Permalink
Comments
1) Increased YoY average credit line $ per household means pretty much nothing.
2) I would bet that Megan McArdle has a pretty good FICO score. I don't doubt that people with very good credit histories will continue to enjoy access to credit. Think marginally though.
3) That said, even if it means short- to intermediate- term pain, it's in our collective best interest if consumers learn to ease up on the reliance on credit.
4) Paulson needs to be stopped. I really think he's losing it.
Posted by: meter at Nov 12, 2008 3:17:56 PM
My teenage son gets several letters per week each offering him a credit card.
Posted by: Steve Sailer at Nov 12, 2008 3:35:35 PM
I attended an MBA information session last week & the financial aid spokesperson said that last year they had 3,000 sources for private student loans, and that this year there are 4. They said they currently don't have any certain sources for loan consolidation.
Posted by: kebko at Nov 12, 2008 3:55:04 PM
"Despite the decline in offers for new cards..."
"despite evidence that issuers are cutting credit lines on certain customers...."
I think the argument needs to many "despites".
Posted by: odograph at Nov 12, 2008 3:58:59 PM
"after listening to Tyler and I"
...Tyler and me...
(damn! I heard Obama do the same thing last night on TV. But that doesn't excuse it.)
Posted by: Dennis Tuchler at Nov 12, 2008 4:05:06 PM
http://www.structuredfinancenews.com/issues/2008_41/186795-1.html
That's a slowdown. It will run back up the pipe to credit available pretty quickly.
Posted by: nelsonal at Nov 12, 2008 4:16:55 PM
> (damn! I heard Obama do the same thing last night on TV. But that doesn't excuse it.)
IIRC Bill Clinton also said "...Give Al Gore and I a chance...". I think I read about that in Steven Pinker's _The Language Instinct_. If a little hypercorrection is ok with Steven Pinker, it's ok with I.
Posted by: David at Nov 12, 2008 4:28:23 PM
Actually, the problem here is a misread of the quote. Paulson wasn't talking about the market for *credit cards* - he was talking about the market for securitizations of credit card debt.
From the article:
"Securities based on credit cards receivables, student loans, auto loans and other loans account for some 40 percent of consumer credit, he said.
"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. "Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy." "
Posted by: Dan at Nov 12, 2008 4:35:11 PM
This extension of the TARP/TERP isn't directly to protect the cardholders, it's to protect the card issuers:
For example, Amex (formerly an excellent 'card issuer', now a fragile 'bank') has $127bn in total assets but retail deposits of just $7.2bn, so they have to roll $120bn in the CP market to keep going. That market has worsened recently.
Of course if Amex defaulted, then many cardholders might struggle too - so it's potentially a general problem - but only insofar as a GM default would be bad for manufacturing jobs generally... oh - yeah. Sometimes bad things need to happen.
Posted by: nick at Nov 12, 2008 4:42:18 PM
P.S. Dan at 4:35:11 PM beat me to basically the same point, but better sourced.
Posted by: nick at Nov 12, 2008 4:47:27 PM
Before debating "What To Do", can someone identify the ideal cost and availability of car loans, student loans and credit cards? Should student loans be available to students of high-default colleges? Dodge Charger car loans to low income? Credit cards to college students? At what level should the government stand astride the Great Deleveraging and say "STOP!"? 2006? 1985?
If the answer is, "I don't know", then should we have Treasury on the case at all?
Posted by: guy in the veal calf office at Nov 12, 2008 5:11:13 PM
I want to ask the authors what is the implication of the empirical evidence of the Financial Crisis on Modigliani-Miller theorem.
Posted by: arun eamani at Nov 12, 2008 5:57:32 PM
I don't doubt that people with very good credit histories will continue to enjoy access to credit. Think marginally though.
But surely one lesson of the recent unpleasantness is that loans were being made to people who couldn't afford them, yes? So quite obviously on the margin one would want loans to be somewhat more difficult to get, it might seem.
Posted by: John Thacker at Nov 12, 2008 6:34:21 PM
arun asks a very good question. My answer is that the financial boom was a massive violation of MM and now we are seeing the resolution.
Posted by: Alex Tabarrok at Nov 12, 2008 6:39:56 PM
I'll tell you how the credit card crunch worries me... Veterinarians. I can attest to the fact that they are having to downsize quickly and cut costs because customers aren't spending money on pet care. MSNBC has a story today:
http://www.msnbc.msn.com/id/27665004/from/ET/
I hope Paulson will include veterinarians in his bail out.
Posted by: BoscoH at Nov 12, 2008 7:03:21 PM
John Thacker,
I completely agree. However, everything's relative, right? The growth in the financial sector, the real estate bubble (and we'll soon see there were others) were predicated on easy money. Now that it is being taken away, it's seen as a "credit crunch," a term that has negative connotations though I think you and I agree it's a good thing.
No matter how you label it though, I think it's silly to posit that it's not occurring. As I said, I think the responsible members of society won't have trouble accessing credit lines, and that's how it should be.
Posted by: meter at Nov 12, 2008 7:04:30 PM
As I said, I think the responsible members of society won't have trouble accessing credit lines, and that's how it should be.
Agreed.
But what happens as this financial mess spreads and orders of durables and consumables decline, folks stop buying, more people become unemployed, etc.?
The problem is spreading, so that many who want to be responsible may not be employed.
Posted by: at Nov 12, 2008 8:35:04 PM
The looming problem of credit card debt is big reason why gas taxes/cap and trade are a really bad idea right now. If gas/oil prices go up again, increasing expenses will shift risk again and that consumer debt will be in jeopordy.
I've looked at fuel efficiency and gas price trends again. And I found that fuel efficiency continues to be negatively correlated with price. It looks to me that the positive correlation of MPG and price is almost entirely due to congestion and price both being seasonal (looking at 4 month smoothed MPG and price, there is lots of movement together, with a period of 1 year). Use 12 month smoothed data to adjust for seasonality, then you see the real relationship.
Don't know my CAFE history, but it's starting to look like a good idea to me. It looks that price reduces consumption almost entirely by destroying productivity. However, CAFE improves fuel efficiency, effectively increasing supply and lowering prices. This means economic stimulus, as lower prices, like roads, induce demand.
Posted by: aaron at Nov 12, 2008 8:49:13 PM
On credit card spending, propping up our unreasonbly high expectations and consumption with more loose money risks inflating demand for oil/gas again. There goes our risk models again.
Posted by: aaron at Nov 12, 2008 8:57:19 PM
Alex, you are way off on this one.
All the more evidence you need is from American Express. They didn't sell a single security backed by credit card debt (because if they did sell at those pices they would lose money).
The supply of credit cards is inelastic in the short run, but in the long run it is very elastic and you'll see the credit card availability drop drastically or interest rates rise drastically.
Posted by: www.ownerearnings.blogspot.com at Nov 12, 2008 8:59:03 PM
After seeing Alex link to my blog, all of my hostility for Tyler instantly evaporated. I realize now, in retrospect, that for months I have been engaged in a subconscious campaign to get hits on my blog. I hedged my bets by being a jerk to Tyler and a suck-up to Alex, not being sure which strategy would be more likely to induce a link. It seems nice guys finish first after all.
Posted by: Bob Murphy at Nov 12, 2008 9:06:47 PM
The credit crunch is in the credit card receivable ABCP market. And rightfully so, because credit card delinquencies/defaults are going to shoot through the roof between now and next summer.
Posted by: Jay at Nov 12, 2008 9:22:59 PM
These are boom times for loan sharks.
Posted by: Michael Salfino at Nov 12, 2008 10:31:00 PM
http://www.structuredfinancenews.com/issues/2008_41/186795-1.html
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3Q08, with any luck, maybe be an aberration. August was actually a negative month for revolving credit expansion and that could be linked to paydowns from tax rebates.
In fact, $9.86 billion is just about the same as how much credit is thought to have expanded in Q3 ($8.1B). So, we might not conclude that the securitization markets are drying up. To the contrary, they appear to have taken all that was on offer (even if hey may have demanded higher quality collateral).
Whatever his faults, I want Greenspan, who knows these numbers upside down and backwards, for Christmas!
Anyway, if Paulson did need to use his TARPoline to spring-load the ABS market, he could consider re-insuring some very modest portion of FICO 640-700, yes? That seems a heck of a lot better way to not get into trouble than buying it up yourself...
Posted by: Amicus at Nov 13, 2008 12:54:21 AM
errata:
"hey" s/b "they"
"portion" should be "proportion", i.e. risk sharing. "re-insuring" may have been a bad choice, too: You want to say that you'll share 20% of the losses, say, on credits below FICO X (or come up with a sliding scale). If you do not leave a residual risk with the borrower, i.e. if you go up to 100% for a slice as you might in re-insurance, the borrower(s) may lose their credit discipline, right?
This could "unfreeze" the lender / borrower panic associated with medium quality credits...
Posted by: Amicus at Nov 13, 2008 1:02:06 AM
