https://wolfstreet.com/2021/01/03/...slaves-in-weirdest-economy-ever/
During the Financial Crisis, consumers deleveraged by walking away from their debts. And now, with 20 million people still claiming unemployment insurance?
...[Credit Card] interest can be very high. 25% is not uncommon....
Credit card interest hasn’t really budged, despite the near-zero-interest rate policy the Fed has been pursuing, and despite its interest rate repression through asset purchases that have brought down long-term interest rates.
Apple can borrow for three years at something like 0.4%, and it can borrow for 15 years at something like 2.4%, based on its current bond yields.
But the average interest rate on credit card balances that are accruing interest – so these are people who are not paying off their credit cards every month but are paying interest on their balances – was over 16%, according the Federal Reserve data. This is higher than that average was in any of the prior years going back to the 1990s.
So the interest rate repression by the Fed doesn’t apply to credit cards. And for the banks in this zero-interest rate environment, credit card lending is a huge profit center with enormous profit margins.
For the Federal Reserve, which is responsible for the banks and regulates the banks, and whose 12 regional Federal Reserve Banks are owned by the banks in their districts, those high profit margins on credit cards are sacred. They fatten bank profits, and that’s what the Fed wants, especially during times when lower interest rates make other types of lending less profitable.
But here’s the thing – and it frazzles the Fed, and it has expressed its concerns over this already.
Credit card balances have plunged by over 10% from a year earlier, the largest year-over-year decline going back to the early days of credit cards. Balances are now back where they’d first been in August 2007, despite population growth and inflation.
During the Financial Crisis, credit card balances also declined, but they took a lot more time to do so. It took nearly three years from peak to trough, and balances fell because banks wrote off the balances they couldn’t collect....
Credit card debt is unsecured, and lenders cannot repossess or foreclose on anything. They have to go to court and get a judgment and then execute on that judgment. But if the defaulters have lost their jobs and their homes by the millions, and they don’t have anything anymore, even obtaining a judgment doesn’t necessarily allow the bank to collect anything. So banks sold this debt for cents on the dollar to collection agencies, and the defaulted credit card balance disappeared from their books.
In other words, consumers deleveraged by walking away.
But during the Pandemic, delinquency rates have dropped for two quarters in a row, and are now near historic lows, and charge-off rates too have dropped and are also low.
So consumers used their stimulus money and their extra unemployment benefits to cure their delinquencies and pay down their credit cards. That’s a real problem with the Fed, because the interest and late fees from credit card balances are a huge profit center for the banks.
And credit card balances also dropped because consumers spent less on services such as hotel and airline bookings, cruises, restaurants, and many other services where credit cards are heavily used. And that’s a problem with the Fed because it wants consumers to crank up the economy by spending money they don’t have, and that’s what credit cards are for.
...Let’s face it, we’re called “consumers” because it’s our job to consume. It’s not our job to be happy and fulfilled because that doesn’t do the banks and the stock market and the economy any good.
Our job is to spend money, and if we don’t have enough money to spend because we don’t get paid enough, we need to borrow this money and then spend it. Being reduced to “consumers” is our fate.
But if we don’t do our jobs and consume enough, the US consumer-based economy will grind down, and the global economy that supplies American consumers all this stuff will grind down, and all heck will break loose, globally. Everyone is counting on us “consumers.”
That’s why the fact that consumers are cutting back on credit-card borrowing frazzles the Fed; it stifles consumption; and the sky-high interest rates in a near-zero interest rate environment is where banks make out like bandits, while those consumers who can least afford it are paying out of their nose for these bank profits...
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