by John M. Curtis
(310) 204-8700

Copyright Sept. 9, 2009
All Rights Reserved.

             Federal Reserve Board data shows that total U.S. consumer credit fell by a record $21.8 billion in July, signaling that consumer spending is not part of today’s economic recovery.  Without robust consumer spending, it’s doubtful a sustained economic recovery can take place.  Consumer spending accounts for about 70% of the nation’s Gross Domestic Product.  July consumer credit also tumbled 10.4% to $2.47 trillion.  Total credit plunged $15.5 billion in June, far eclipsing the $10.3 billion forecasted by the Fed.  “It is one more important sign that consumer are not going to be contributing very much to the economy for the balance of this year and probably not for a good part of the rest of next year.  Consumers will be in the background,” said Bernard Baumohi, chief economist at The Economic Outlook Group in Princeton, New Jersey, putting more pressure on the stock market.

            Without consumers fueling economic activity, the stock market must pick up the slack, leading the economy to recovery.  With markets rebounding nearly 50% from their March lows, the overall economy has become more dependent on the stock market.  Publicly traded corporations rely heavily on the market to generate cash to finance future business activity.  Past bull markets have led the economy out of recessions, providing the cash infusion needed to jumpstart the business cycle.  Despite some minor ups-and-downs, the stock market appears to be holding up, a positive sign for future economic growth.  Unemployment is a lagging indicator in most recessions.  When companies begin rehiring laid-off workers, consumers once again return to the market with renewed enthusiasm.  While July’s employment report showed a loss of 220,000 jobs, it was far less than June.

            Hitting 9.7%, unemployment continues to bedevil economic recovery, keeping consumers on the sidelines.  Consumer credit has declined six consecutive months, the first time since 1991.  Since Dec. 2007, the economy has shed over 7 million jobs, sheer misery to a consumer-driven economy.  Though the past Bush administration denied the economy was in recession through Summer ’08, the Fed’s data indicates the recession started in Dec. ’07.  “There is no way that this recovery can be sustained unless we see a pickup in household spending.  The big question out there is will we see Americans spend again to keep the economy alive,” said Baumohi, seeing no light at the end of the tunnel.  Without credit to spend, consumers—especially homeowners—have limited resources.  Lending standards, both commercial and real estate, have become so draconic, few people qualify.

            Since the banking crisis began Dec. ’07, financial institutions have punished consumers and businesses, raising lending standards and making it more difficult to qualify for credit.  When Investment banking giant Bear Stearns failed March 16, 2008, it was not due to ordinary borrowers defaulting en masse on residential or commercial loans.  Bear Stears failed because of a disproportionate weighting in highly-leveraged mortgage-backed securities known a “derivatives.”  When their value plummeted marking the end of the real estate bull market, Bear Stearns’ liquidity evaporated, forcing the company to close its doors.  Had it not been for then Treasury Secretary Hank Paulson and Federal Reserve Board Chairman Ben S. Bernanke pushing for the merger with J.P. Morgan Chase, the 80-year-old investment house would have closed its doors forever

             Consumers paid a draconic price Sept. 15, 2008 when Paulson and Bernanke turned thumbs down on Lehman Brothers, causing the last stock market meltdown, dropping the Dow Jones Industrials from 11,000 to 6,500, nearly 50%.  Credit evaporated so fast that otherwise solvent institutions went under.  Credit disappeared so quickly that the Treasury and Federal Reserve had to step in with emergency cash.  Former President George W. Bush and President Barack Obama created nearly $1.5 trillion in bailout funds.  Without restoring credit, the economy was doomed to recession  “Credit is still shrinking and that is going to have an impact on consumption.  As such, this remains an important part of the recovery since without smooth functioning of credit markets, the recovery may stall,” said Charmaine Buskas, senior economics strategist at T.D. Securities in Toronto.

            Ending the consumer and business cash crunch requires lenders to stop blaming borrowers and take a hard look at risky investment strategies.  Bear Stearns and Lehman Bros. failed because of risky derivative trading, not because ordinary borrowers defaulted on mortgages.  While the economy is poised to come out of recession in Q-3, consumers must be afforded the needed credit to jumpstart the economy.  Raising the lending bar too high not only hurts consumers but decimates the economy by stifling consumption.  Cash-for-Clunkers proved that the government can play a positive role in stimulating the auto industry.  With unemployment running high, it’s doubtful the federal treasury will balance its books anytime soon.  Congress must rein-in zealous federal regulators and loosen credit to more borrowers, creating the kind of consumer incentives necessary to stimulating the economy.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.