The Wall Street Journal reports that U.S. Banks are rediscovering consumer debt, and making 3.7% more new consumer loans in the third quarter of 2010. This includes car loans, and 36 million new credit cards.
WSJ, Jan 15, 2011 "Banks Loosen Purse Strings" "Among so-called near-prime borrowers with credit scores of 620 to 749, the approval rate jumped to 83% from 70%. In addition, down-payment requirements have loosened, and "there are plenty of resources for financing..." Id.
This is good news for banks, whose profits are rebounding. And a healthy banking and financial sector is good for all of us. We came scarily close to another Depression when the credit system closed down during 2008. But have we all learned the lessons of that crisis and what led to it?
The underlying problems that got us there are still with us. To use Elizabeth Warren's phrase, is there a "cop on the beat" to police and control abusive and uncontrolled lending practices and securitization of loans? In the 19th century, this country followed a "wild west" laissez faire approach to regulating markets and economy. We had booms and busts, major depressions and bank failures. We should not be surprised when a return to that same approach leads to similar results.
A regulatory system that ensures that borrowers have clear and easily understandable disclosure of important loan terms and risks is neither unfamiliar to us nor detrimental. Truth in Lending disclosures for consumer loans has been with us for over 30 years. Why not have the same for home mortgages? For car and small business loans? Can we get away from the "word barf" (as Elizabeth Warren recently called it) in loan documents that confuses and conceals the true costs and risks of these important commitments?
But disclosure is only part of the solution. Borrowers have to learn from past mistakes, both theirs and that of others. Far too many of my clients simply did not understand or chose to ignore the basic principles of money and money management. Many forgot that "money does not grow on trees". Many were desperately trying to hold onto the middle class dream that we baby-boomers grew up with. As the middle class has been squeezed over the past 30 years, and as the marketing of spending and borrowing against the future to pay for it, they got in over their heads. There is a lot of blame to go around.
Our system is oriented to consumer spending and borrowing. It is so easy for people to believe they have matters under control when they have easy access to credit card debt. Many people tell me they have things under control because they think they can pay the minimum payments on what turns out to be a large load of high interest credit card debt. And indeed, it is very easy to feel comfortable having borrowed a few thousand dollars that only cost $80.00 per month. But people then continue to borrow more and more and the debt load mounts until one day they can wake up with the $50,000 plus credit card debt that seems typical nowadays. Easy access to easy credit is what led to the real estate bubble. It has led to another looming crisis, in student loan debt. But that is a topic for another day.
Efforts are underway to try to educate people about the basics of money management and credit. I have not seen that our schools always appreciate how very important this basic life school is to the welfare of their students. Sadly, most people I see know more about how their computer works than how their money and debt works.
I would hope that the caution people have exhibited recently, curtailing new debt and trying to save more, will continue. This country will need more and more of this in the coming decades. If not, we crisis we may be just emerging from will not be the last.
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