Avoid Collateral DamageKevin Mellyn |
The good news this week is that consumer borrowing in the United States jumped by over $20 billion in November, the biggest increase since November of 2001, according to Federal Reserve data. Leaving aside whether or not this reflects a real turning point in consumer confidence, the increase reminds us that in an economy where consumption is around 70% of GDP, the U.S. needs ample supplies of accessible and affordable consumer credit to bridge the peaks and valleys of household disposable income. The alternative is a downward spiral, as reduced consumption depresses employment and further depresses consumption.
Oddly, consumer credit has a bad reputation even in its U.S. heartland and is often described by critics as an American deformity. Actually, the relative absence of affordable consumer credit and cultural biases against using it retards consumption-driven growth in many economies. For example, China’s 12th Five Year Plan includes the transition to consumption-driven growth as a central objective, although the country lacks an efficient retail credit system.
The ability of banks to generate and fund affordable consumer credit for a wide range of income groups can be a casualty in battles for reform. Innovations like asset securitization, derivatives, and the credit card itself were engines of consumption, employment, and prosperity for a generation before the 2008 crisis. We will need them going forward if the economy is to recover in a sustained fashion.