By Steven K. Beckner

(MNI) – Federal Reserve Governor Elizabeth Duke said Thursday that
household credit outstanding has been “very slow to rebound,” even as
consumer spending has increased from recession levels.

Duke said one of the main reasons is that Americans have become
less willing to borrow money to finance purchases. Even as consumer
spending has risen, revolving credit — primarily credit cards — has
continued to decline.

“During the recent financial crisis, the Federal Reserve and other
policymakers throughout the government took unprecedented actions to
mitigate the fallout from severely distressed market conditions and
support the flow of credit to consumers and businesses,” Duke observed.

“Nonetheless, the level of credit outstanding for households has
been very slow to rebound and remains lower than it was at the onset of
the crisis.”

“Revolving credit has dropped every month since that time and is
currently about 15% lower than it was at the time of the Lehman Brothers
Holdings bankruptcy” in October 2008, Duke noted in remarks prepared a
Philadelphia Federal Reserve Bank conference.

“Although our economy has experienced other long episodes in which
revolving credit growth has slowed, we have never seen such a prolonged
period of outright decline,” she added.

Duke said “the decrease in revolving credit appeared to outpace the
contemporaneous decline in spending during the recession, and, so far in
the recovery, revolving credit has continued to decrease even as
spending has turned up.”

She said “this suggests that there are factors at work other than
cyclical spending weakness.” She listed three main reasons that net
borrowing can decrease: “First, households can charge less on their
revolving accounts; second, households can pay off a larger share of
their balances each month; or third, households can default on (or
lenders can charge off) their existing balances.”

Duke said defaults did indeed increase due to high unemployment,
falling incomes and declines in home equity, noting that the charge-off
rate on credit cards more than doubled from 4% in 2007 to more than 9%
in 2009.

Although the rate of charge-offs has declined from its peak, it
“remains elevated,” she said, estimating that the rise in charge-offs
accounts for a third of the net decline in revolving credit.

She said that faster payoffs of credit card balances are not a
significant factor in the decline in outstanding credit balances. She
said that since August, the pay-off rate has returned to “a more
typical level.”

Duke concluded that household credit outstanding is down primarily
because “consumers have been charging less on their credit cards.” The
amount of money charged on credit cards for purchases or cash advances
fell around 10% between the third quarter of 2008 and the first quarter
of 2010.

She cited several factors for causing the decline in credit card
charges.

“The significant overall drop in consumption during the recession
no doubt cut into the demand for credit, as households simply opted to
spend less than in the past,” she said. “When they did spend, they may
have been less willing to borrow to fund consumption given their
experiences during the financial crisis, expectations for weaker
economic conditions, and continued uncertainty about job prospects.”

“Indeed, consumer preferences toward debt do appear to have
shifted,” she continued, citing data showing that more people think
buying on credit is a “bad idea,” and “those households whose views
about buying on credit became more negative between 2007 and 2009
reported reducing their charges substantially more than other
households.”

“Consumers also appear to be seeking less new credit,” she said.
“Applications for new credit accounts … remain significantly lower
than were observed for most of the past decade.”

“Overall, then, the available data lead me to conclude that, in
large part, the decline in revolving consumer credit outstanding is due
to a combination of higher charge-offs, tighter credit, and less
consumer willingness to take on debt, but probably not to widespread
increases in discretionary paydowns of existing debt,” Duke said.

** Market News International **

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