Consumer and business lending is stagnant

Yesterday, I argued that one of the most concrete signs that uncertainty is hanging over the economy and holding back growth is the nearly $1 trillion in bank excess reserves  sitting at the Federal Reserve earning next to nothing.

Today we’ll look at what’s happened to consumer credit over the last thirty years, take a quick look at commercial and industrial loans and focus on the much-talked about gamble by the Fed to keep inflation from falling below zero and boosting growth.

The nearly uninterrupted upward trend in consumer credit over the last couple of generations came to a screeching halt during the last recession. Despite an economy that began to grow last summer, consumers have shied away from taking on more debt. See chart 1.


(click chart to enlarge)

Chart 2 looks at consumer credit from a different angle, focusing in on the annualized monthly change in consumer credit. 


(click chart to enlarge)

Businesses and industrial firms reacted far more negatively to what’s been going on in the economy, as chart 3 illustrates. Only in the last couple of months has lending stabilized. 


(click chart to enlarge)

Consequently, the trillions the Fed has pumped into the system kept the credit markets afloat, but the funds did not work their way into the economy in the form of new lending. It ended up as excess reserves (see chart) that are being held at the Fed.

This brings us to the possibility that the Fed will implement a new plan in order to prevent a possible bout with deflation and support growth.

In the just-released Fed statement, Committee members said:

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

Members added that they will

“continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Thus far the Fed has purchased $1.25 trillion of agency mortgage-backed securities, about $175 billion of agency debt and $300 billion in Treasury securities. 

It also announced in August that it will no longer allow its balance sheet to shrink, and instead, will take the proceeds from maturing debt and purchase longer-term Treasurys.

The massive purchases may have capped longer-term yields, but it has failed to spark a robust recovery.
Another round of quantitative easing may bring down longer-term yields a bit more – the Fed’s sway over long-term interest rates is not concrete like it is over the fed funds rate – but one has to wonder how low mortgage rates have to go in order to encourage fence sitters to enter the housing market and prop up prices and sales.

Again, we are back to the premise that monetary policy has lost its effectiveness, i.e., is the Fed just pushing on a string (see Excess reserves and heightened uncertainty).

The cloud of uncertainty that’s limiting visibility needs to be blown out to sea, and only then will the stage be set for a healthy recovery.