Last night we chatted with an old time British banker who gave us quite an earful about the banking industry. He was disgusted with the state of the banks who overpaid and over grew and then were technically insolvent before being rescued by taxpayers. We had talked about this report that came out yesterday where consumers chopped borrowing by $15.7 billion last month. The banker thought that no matter how much spin the banks and governments offered, the man on the street wasn’t a complete fool and knew that they had to stop spending at the previous rate.
Eliminating borrowing, if possible, is a wise move in this economic environment (any time, really) but at the same time the US economy needs consumers to spend in order to recover. Bouncing back to pre-credit crisis spending is not likely nor is it very wise.
Borrowing by consumers fell by $15.7 billion in April as U.S. households continued to trim spending and put away their credit cards amid a severe recession.
The Federal Reserve said Friday the April decline was the second largest ever in dollar terms following March’s drop of $16.6 billion. March’s decline originally was reported as $11.1 billion, which had been the most on records dating to 1943.
The April decline was more than double the $6 billion drop that economists had expected. Analysts believe consumers will remain cautious as long as the unemployment rate keeps rising, which it did again in May.
Without the old record high borrowing rates, where will the banks turn to raise easy, though risky money? There have been a few signs from the industry that they are cutting back but too few to mean very much. As we discussed last night with the banker, the money from recent years has distorted the entire industry from all reality. They still think they are deserving, profits or no profits. There is little grasp of the seriousness but why would think that the world has changed when they are still treated so gently by governments around the world?
Another future issue in the world of credit is the government borrowing. In the near term there is little choice but eventually the appetite for buying government debt is going to dry up unless the return goes up. For investors receiving those returns that is good news but for our governments, this is very bad news. Somebody better start creating the new business cycle quickly and because the model of the last few years is not going to do it.