The Wilder View

Household Saving: Part One Million

Janet Yellen made waves last night, as she was very negative on the US consumer. She said this in her speech,”I also think that a massive shift in consumer behavior is under way—one that will produce great benefits in the long run but slow our recovery in the short term.”

Through Yellen’s speech, I would like to re-iterate this for the millionth time (here, here, here, etc.): the operating word in this quote is “think”, because nobody knows whether consumer saving will going back to its now-heralded levels in the 1970’s and 1980’s, remain at its current non-fiscal stimulus level (something below 6.9%), fall slightly to the 4-5% range, or even go back to 0% (unlikely).

Regulation and fiscal policy are severely distorting the data. Notice that households paid down (defaulted on) consumer debt in Q1 2009, not mortgage debt. This perfectly coincides with recent regulations on the credit card industry (see LA Times article below).


The chart illustrates total residential mortgage and consumer liabilities as a share of total household debt, which is constructed as liabilities not attributable to nonprofit organizations, as reported by the Fed’s Flow of Funds B.100 balance sheet. In Q1 2009, the consumer share fell 0.4% to 19.3%, while the mortgage share grew 0.5% to 79.9%. In Q1 2009, debt reduction was focused on the consumer credit side.

Over the year, consumer and mortgage debt are falling. What could be causing this?

Defaults? Yes. Bank charge-off rates are rising quickly across all loan types, except commercial mortgages; and delinquency rates are through the roof. However, the consumer credit delinquency rate in Q1 2009 rose 11% since Q4 2008, while that for residential mortgages grew 24%. From that, one would surmise that mortgage debt should be falling faster.

Consumers are actively paying down credit? Probably (definitely). All types of consumer credit (auto loans, student loans, credit cards) have been falling according to the the Federal Reserve’s monthly G.19 statement. However, much of that is on the revolving side (credit cards). And for how long will that last? That all depends on income growth.

Standards are worsening? Yes, anecdotally. Today, the LA Times is running an article about Chase increasing credit card holders’ monthly minimum payments by more than 100%:

Van Nuys resident Richard Levinson figured he was getting a pretty sweet deal when JPMorgan Chase & Co. offered to charge an average 4.5% in interest if he’d transfer his outstanding credit card debt to the bank.

Levinson, 54, a musician, planned to use the Chase account as a rainy-day fund that would cost relatively little to maintain.

“I work in an industry where I can never be sure of my income,” he told me. “This provided me with cash at an interest rate that was guaranteed for the life of the loan.”

Now Levinson finds himself among about 1 million Chase cardholders who have been notified that their monthly minimum payment will more than double in August to 5% from 2%.

“They’re essentially calling these loans,” he said. “They either want their money back or they want to force people to default so they can charge rates closer to 30%.”

When I read articles like this I wonder if household saving behavior has indeed changed. It could be that households are just planning to default when needed, pay down credit when forced to, and wait for better days. I just don’t know. But I suspect that government regulations (credit cards) and incentives (Obama’s insistence on refinancing troubled mortgages) are severely distorting the data.

Originally published at News N Economics and reproduced here with the author’s permission.

5 Responses to “Household Saving: Part One Million”

Caveat EmptorJuly 1st, 2009 at 5:45 pm

If data about consumer, borrower, and lender behavior is “distorted” because of government behavior that affects the finances of its citizens, then we have had no undistorted data since the founding of the Republic, when the government made its first decisions regarding currency, taxes, bonds, banking, public land transfers, etc. Maybe it’s time to upgrade your thinking to the real world and include government behavior as an intrinsic, rather than extrinsic, part of the economy (R.I.P. Prof. Friedman).

GuestJuly 1st, 2009 at 6:22 pm

That would be nice, except that we have no idea as to what, in fact, government is. Just as we have no ideas as to what, in fact, property is.Why not? West Coast Hotel v. Parrish. Under West Coast, which grants the political system near-absolute power with respect to the facts, no adversarial investigation of the facts can proceed, because no individual has the right to force that with respect to most facts.So, “intrinsic” versus “extrinsic” are just labels to hide a void: the void of our ignorance as to what government, in fact, is.

GuestJuly 1st, 2009 at 6:23 pm

Oh and by the way. Janet Yellen is a criminal. Can’t you wait til the revolution and she goes to the wall? Along with Nouriel? Can’t wait!!

steve JONESJuly 4th, 2009 at 11:07 am

Many Customers, including myself, have been told by JP Morgan Chase that they can be spared from the extremely high 5% of the balance payment, and have their monthly payment returned to their current level, IF they agree to give up their low fixed interest rate for a higher rate.It is this posters opinion that JP Morgan Chase has tried to create an unreasonable payback structure in order to make customers fearful of the consequences of defaulting – and to try to coerce them to relinquish their low fixed rate of interest.It is this posters opinion, that with Malice aforethought, the board of directors of JP Morgan Chase, have conspired to extort money from hardworking citizens by forcing them into a situation of fearfulness that their credit rating, availability to credit, financial stability and reputation in their community will be harmed if they do not bend to the will of the credit card company.JP Morgan Chase argues that it retains the “right” to raise the minimum payment under the service agreement of the loan.I believe that “right,” if it does exist, has been illegally used as a smoke screen to extort money from nearly one million American families by trying to skirt the Truth in Lending laws.This posters opinion is that JP Morgan Chase, with malice aforethought, used the threat of unreasonable monthly payments, the fear of default, damage to the customer’s credit rating and reputation, as a scheme for raising the interest rate on loans that have a fixed rate of interest and are protected by the Truth and Lending laws.It is my opinion that JP Morgan Chase and Co. is currently using tactics to extort money from approximately 850,000 families who have loans with low, fixed interest rates and have never been late with a payment.It is time the authorities see this unscrupulous tactic for what it is – EXTORTIONARY LENDING.Please print this post and take it to your local district attorney or contact the FBI in your area.And by all means send this post to your representative in Washington.

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