The New York Times
By: Gretchen Morgenson
August 21, 2010
IT'S one of the toughest lessons an investor has to learn: while the value of assets can plummet posthaste, it takes forever to shrink the debt that was used to buy them.
Last week, this harsh truth was made clear yet again, in a report on consumers' financial well-being by the Federal Reserve Bank of New York. The first of a Fed series to be published quarterly on household debt and credit, the 38-page report shows just how tapped out the consumer remains three years after the borrowing bubble burst.
To be sure, the data indicates that consumers are doing what they can to kick their debt habits. But the process is slow.
For example, total consumer debt stood at $11.7 trillion on June 30, down just 6.5 percent from its peak in the third quarter of 2008. The number of open credit card accounts was down considerably -- 23.2 percent -- from the highs reached during the second quarter of 2008, while mortgage obligations have fallen 6.4 percent from the peak that was seen almost two years ago.
Many consumers, though, are still very much in a vise. Halfway through this year, 11.4 percent of outstanding consumer debt was delinquent, up slightly from 11.2 percent a year earlier. An astonishing $1.3 trillion of consumer debt is delinquent, with $986 billion seriously so -- 90 days late and counting. While delinquent balances are down by about 3 percent from the same period last year, serious delinquencies are up a bit more -- 3.1 percent.
Here are some other troubling statistics from the Fed: a half-million people had a foreclosure added to their credit reports between March 31 and June 30, an increase of 8.7 percent over the first quarter of the year. And the numbers of consumers with new bankruptcies appearing on their credit reports rose 34 percent during the quarter, to 621,000. That increase is significantly bigger than it has been in the last few years, according to the Fed.
Per capita debt balances are staggering, as well -- and for many consumers, the assets underpinning these obligations have collapsed. Reflecting the heavy burden that mortgages represent for most consumers, these debts are highest in states where the real estate mania went craziest. In California, for example, the average per capita debt balance among consumers with a credit report is $78,000, the Fed said; in Nevada, it is $73,000. The nationwide average is $49,000.
ADDING to the weight of these debts is the fact that consumers' income statements aren't exactly flush right now, thanks to high unemployment and rock-bottom interest rates. The misery of a balance sheet deleveraging is being exacerbated by a dearth of income opportunities.
Of course, this is what happens after a spectacular asset bubble bursts. Nevertheless, for consumers who are cutting debt and trying to save, it is dispiriting indeed that they generate so little on their money. Those living on fixed incomes are also in a bind.
It is not lost on these consumers that their minuscule returns are a direct result of the Federal Reserve's attempt to shore up troubled banks' financial standing. Sharply cutting interest rates vastly increases banks' profits by widening the spread between what they pay to depositors and what they receive from borrowers. As such, the Fed's zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.
Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed's interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn't otherwise go near.
In short, the Fed's interest rate policy may be causing more economic problems than it's solving.
Here's how Mr. Petzel calculated the amount that savers are losing: Some $14 trillion in debt issued by the Treasury, federal agencies and municipalities is held by investors here and overseas. Rates are currently near zero on short-term Treasuries, compared with an average of 3 percent over time. Therefore, Mr. Petzel says, it is reasonable to estimate that rates are too low by 2.5 percentage points. On $14 trillion, that's $350 billion a year in lost income.
Yes, we're talking real money. It's more than 2 percent of gross domestic product and almost 3 percent of disposable personal income, Mr. Petzel noted.
"If we thought this zero-interest-rate policy was lowering people's credit card bills it would be one thing but it doesn't," he said. Neither does it seem to be resulting in increased lending by the banks. "It's a policy matter that people are not focusing on," Mr. Petzel added.
One reason it's not a priority is that savers and people living on fixed incomes have no voice in Washington. The banks, meanwhile, waltz around town with megaphones.
Savers aren't the only losers in this situation; underfunded pensions and crippled endowments are as well.
Of course, the federal government is a huge beneficiary of low rates; if they were higher, our already ballooning deficits would be heftier still. Nevertheless, raising interest rates a bit would be beneficial on several counts, Mr. Petzel maintains. It could help increase consumption and would reduce the appeal of higher-yielding and dicier investments.
THE Fed may be fearful, Mr. Petzel surmised, that higher interest rates could push some teetering banks off the cliff. "But saving a few more zombie enterprises with strong Washington voices at the expense of millions of savers' consumption may be missing the forest for the trees," he said.
As the midterm elections approach, expect to hear arguments that the recent bailouts have not been that onerous, when all is said and done. But such contentions are unlikely to include the costs of near-zero interest rates, a sizable line item on any accurate reckoning of the bailout bacchanal.