Half a league onward,
All in the valley of Death
Rode the six hundred:
'Forward, the Light Brigade!
Charge for the guns' he said:
Into the valley of Death
Rode the six hundred.
Charge of the Light Brigade
Alfred, Lord Tennyson
Miscommunication in the Battle of Balaclava on October 25, 1854 sent 600 British soldiers to their deaths during the Crimean War. Many believe the word "charge" is itself the way to self-destruction, especially when it comes to personal finance. Those with discipline can actually take advantage of credit card companies these days and build up goodies like free air miles as long as they pay their bills in full and on time. Unfortunately, that is a tiny sliver of the population. The rest eventually cut corners and end up tapped out to the point they have to cross their fingers at Starbucks after already taking a sip from a Trenta-sized cup of coffee.
Late Tuesday, the market spiked higher after the release of the latest data on consumer credit. For the second consecutive month, the number blew away consensus. The experts were looking for a $7.0 billion consumer credit increase in December, but the actual number was $19.3 billion. The number was driven largely by demand for auto and student loans, which sent non-revolving credit higher and caught the experts off guard.
There are several narratives to this news, including the fear of debt but also the need to get the wheels of commerce moving again. There is no doubt debt is dangerous, and there was too much credit out there pumping up the housing market, but we need commerce to get out of this mess. I realize I'm breaking a cardinal rule of Dave Ramsey and other brilliant folks that preach the gospel of cutting up credit cards.
I don't use credit cards, and at one point in my life, I went ten years without any. But there is a role in this economy for the ability of households to access credit.
The interesting thing is the free market is still not in the mix to the degree it should be as government non-revolving loans (students with lingering Sallie Mae loans included) increased $8.8 billion while all non-revolving loans spiked $16.6 billion. This is great news for the auto sector, which has become the new subprime epicenter.
I don't think anyone in the nation could be turned down for an auto loan these days. The Fed has been printing money like crazy for a few years now and hardly any of it has reached Main Street. It's all gone to banks to shore up flaccid balance sheets and pay bloated bonuses. Now, that cash is trying to escape into the system and seek out hands that would put it to work.
I think its good news in the sense banks have said there was no demand for loans because as we know, people, especially broke people, don't want money. The problem has been lending standards that swing so far from the lax period that pumped up the housing balloon that the most credit-worthy borrowers were turned away. It's pretty clear banks are now more willing to play ball, maybe in part to the fact there are fewer ways for them to make money. You could also make the argument the uptick in demand is a sign of increasing confidence. Again, I'm not buying into that one completely.
Banks Loosen the Screws
In the second quarter of 2008, 50% of lending officers told the Fed they refused to lend to those that didn't meet lending standards. Now, none of the banks say that. Back then, 57% raised credit score requirements and 10% increased minimum payments, now it's 0.0% and 2.4%, respectively. Those trends continue for would-be borrowers in both credit cards and consumer credit.
There is a greater sense of normalcy, but it's against the backdrop of a deep recession that has us cheering mediocrity. That said, I think the street overlooks this consumer credit number too much ... it's at the heart of the matter when it comes to building and crashing great economies.