Friday, October 20, 2017

Credit Card Debt, Fed Chair Nominees and Congress' Tax Plans

Just some assorted reading for today, with some light commentary added.

Overall credit card debt is increasing as banks increasingly turn to credit cards as a source of profits.  It's easy to get worked up over "usurious" banks, or alternately, "reckless" consumers, but the truth is banks exist to make a profit, so they're going to lend money and charge high interest rates to the extent they can, and consumers are going to borrow if they have no alternative.  Here's the money quotes for you TL;DR types.  Emphases added mine:

That business model is increasingly lucrative. Many consumers, their wages stagnant and their costs rising, are growing reliant on credit cards for essential goods and services, including medical and dental care. Across the industry, profits rose in the latest quarter.

In the years since the financial crisis, the largest United States financial institutions churned out profits largely thanks to a booming business in trading and structuring bonds and other securities. Advising corporations and other institutions on their finances and strategies was another lucrative revenue stream.
Now, though, those businesses are flagging, in part because financial markets have been eerily calm.

So banks are turning more to lending to consumers — especially through credit cards — to pick up some of the slack.

Many Americans have seen their savings winnowed by a combination of the recession and stagnant wages. Almost half of adults said they could not pay for a $400 expense without selling something or borrowing money, the Federal Reserve has found. Some 44 percent of people with credit cards are currently carrying a balance, according to the American Bankers Association’s latest quarterly analysis, up 1.7 percentage points from the same period two years ago.  (NY Times)

 Roughly the same amount of aggregate credit card debt as on the eve of the last major financial crisis.  Not that that should keep you up at night, but certainly worth monitoring... (Source: Business Insider)
You can hardly blame banks, which exist to make a profit, for extending credit to people who can't pay their bills otherwise, and then charging them interest for it.  The outrage, if there is to be outrage, should lie at the feet of the forces responsible for stagnant wages.

The good news is: wages are actually rising! Dean Baker has the details.  But wage growth can be stopped dead in its tracks if Donald Trump appoints a "fiscal hawk" to Chair the Fed.  Here's a look at five candidates who Trump might consider.

The killer would be Kevin Warsh.  According to Politico, the current favorite is Jerome Powell, which would be a decent appointment, compared to Warsh, who is a hardliner, and would likely look to raise rates, which would slow economic growth.  Powell, by contrast, has voted consistently with current chair Janet Yellen and the very moderate moves she's made.

If wages continue to grow, then folks won't get swallowed by credit card debt.  If they don't, credit card debt could balloon into a real issue, and threaten to undermine not only low-earning worker/consumers but worker/consumers across the board.

Of course, even if the Fed did raise interest rates, if there was some sort of plan to generate sizable economic growth (and with it, inflation), it might not matter!  Unfortunately, the GOP-led congress is gearing up for a $1.5 trillion tax cut, possibly.  Such a tax cut is almost certain to disappoint in terms of economic growth, as this chart makes clear:

Look at the red line: as it dips downwards, do you see the radical increase in GDP growth (the blue bars) that follows?  Neither do I.

Maybe instead of a big-ass tax cut, we should do what the American Society of Civil Engineers suggests and invest $2 trillion in our dilapidated infrastructure.  A big infrastructure plan was one of the main selling points of Donald Trump's election, and so far he and has party have not only failed to deliver, they're basically stopped talking about it.  Sad!

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