Americans borrow more heading into the holidays
Remember when everyone said that a financial crisis would cure Americans of their credit habit? WRONG! U.S. consumer credit in October was up for the second straight month, with both revolving (mostly credit cards) and non-revolving (student and auto loans) increasing.
The Federal Reserve said that total consumer credit increased $7.65 billion, or an annual rate of 3.75 percent; revolving credit was up $366.2 million, or an annual rate of 0.6 percent; and non-revolving credit gained $7.28 billion, an annual rate of 5.25 percent. Gains over the past two months reversed a steep drop in borrowing from August, when the debt ceiling crisis and stock market plunge caused borrowing levels to drop by the largest amount in 16 months. The Fed's report excludes mortgages, home equity loans and other loans tied to real estate.
Economists are going to like this report. They'll say that the willingness to assume debt is a sign that Americans are feeling more confident about the economy and since consumers represent 70 percent of GDP, we need that confidence to lift us during this slow-growth recovery.
Those of us who watched people borrow and spend like drunken sailors five or six years ago are a little wary of the so-called "progress." The root of the financial crisis was credit -- too much of it was available and it eventually helped inflate the housing market bubble. As people felt richer because the value of their homes soared, they kept adding all sorts of debt to their balance sheets.
Easy credit also lured big banks into making massive bets on the housing market with borrowed money, which further exacerbated the bubble. Abundant credit led to both reckless borrowing and lending, but there was another problem that was discovered during the bubble -- some consumers really had no idea how compound interest worked. I know this is shocking (she says, dripping with sarcasm,) but some credit companies weren't particularly interested in educating them.
In a twist of bad timing, on the day that one part of the government tells us that consumers are returning to their bad old ways, the newly-formed Consumer Financial Protection Bureau (CFPB) has unveiled a two-page prototype credit card statement, along with a separate set of incorporated definitions, both of which strip out the jargon and fine print and replace the gobbledygook with clearer language. Note that this is a model form, and use by the big lenders is not mandatory, so you won't see these any time soon. That's a shame, since uptick in borrowing means that Americans could be repeating some of their bad habits.
