Wednesday, February 19, 2014

2013 4Q Household Debt

Household Debt numbers are out for the 4th quarter, and they continue to look expansionary.  This is a necessary development if momentum is going to carry us beyond QE3.  Here are some graphs (I exclude student loans).  The bottom is clearly behind us now:





Here is the cumulative change, in dollars, since 2010, by category.  This makes it clear how much mortgage debt dwarfs all the other categories.  Also, all categories, except Home Equity, are growing now.  And, all of them are accelerating.

The acceleration is clear in the aggregate Q/Q growth rate, also.  Q/Q growth is now back to the range of a healthy economy.  The question now is whether it stays there or continues accelerating so that we get some bounce back growth that is higher than normal.

New mortgage originations have weakened the last couple of quarters, although they are still higher than 2009-2011.  But, this probably means that most of the acceleration in credit is coming from a slowdown in foreclosures.  Delinquency rates on new credit are generally back to normal, so it would be nice to see some more growth from new credit.  But, in either case, I consider it to be a good sign for 2014 that banks are willing to expand their balance sheets.

QE3 has been adding just under $1 trillion in deposits to bank balance sheets per year, and it looks like household credit is setting up to increase at at least that pace this year.  A question I have had for this year is whether banks are healthy enough to pick up the slack from the QE3 taper.  This report suggests that the answer is yes.

10 comments:

  1. Wonderful post and data-set displayed here, Kevin. I've been reviewing similar FedGov private sector debt level trends (back to 1993) lately as well. Your displayed data-set doesn't go back that far, but has better detail breakdown as to types of household debt. (By the way, you might find it interesting to extend your data back, at least to 1993).

    Your final "question" puzzled me though ...

    "A question I have had for this year is whether banks are healthy enough to pick up the slack from the QE3 taper."

    That question seems to proceed from the very defective, but equally common, premise that "banks" actually OWN the money they make available for lending to the private (or even public) sector.

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    1. I'm not sure I follow you. Banks have capital, and they expose themselves to risk in some proportion to that capital. As the quality and quantity of their capital base grows, they have more capacity to facilitate more investment. Banking is complicated, so I am happy to see if there is an error there. Explain.

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  2. I'm afraid I can't un-complicate banking in 4096 bytes. But I think I can provide a more accurate and usable overall perspective of what the financial system is and does within that space.

    "Banks" don't OWN the money they lend into the economy, they PROCURE the money to lend into the economy - from primarily non-bank Depositors/Creditors. "Banks" (the entire financial system, actually) only provide an agency function to the economy. Acting as agents directly for those primarily non-bank Depositors/Creditors, "Banks" make the Depositor's/Creditor's money available to borrowers. In short, it ain't the "Banks'" money. And "Banks" didn't get bailed out in 2008, the Depositors/Creditors got bailed out - via their agents, the "Banks".

    Your observations on "bank capital" are somewhat correct. But bank capital is only a very small fraction of the money even ostensibly available to lend to the economy. (And some think far too small a fraction.) As a matter of fact, the entire issue/debate/gnashing-of-teeth surrounding bank capital requirements that began in 2008 (earlier, actually) and continues today centers on how much bank capital (bank-owned money/assets) have to be kept liquid and unexposed to any risk, in order to have it available to make Depositors/Creditors "whole" - in all conceivable conditions of macroeconomic trends, asset re-pricings, borrower default trends/rates, runs, etc. - without having to resort to extraordinary Fed or Treasury intervention, as happened in 2008. The issue of bank capital requirements is one of how much need be kept unexposed to risk, as a "buffer" in worst case economic scenarios. And that is the only inherent risk associated with bank capital.

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  3. So, you're saying that banks have to manage their risk exposure when considering the size and quality of their assets compared to their capital base?

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    1. The way you phrased your question leads me to answer, "No, I'm not saying that".

      What I am saying is that an inherent part of bank risk management entails retaining some portion of bank-owned capital (equity, assets) in non-risk/low-risk, liquid form in order to always be able to service the bank's liabilities - both as a matter of prudence and as a matter of regulatory compliance.

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  4. Getting back to my original comment, it seems you believe that U.S. banking system "health" (capital base amount and makeup??) has been the dominant or even sole limiting factor in the suppressed household debt levels/trends through Q2 2013.

    I know some folks believe that is the case. But I may have misinterpreted your "question" in the post. That's why your question puzzled me. Perhaps I should just ask - do you believe that?

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  5. I believe that has been a limiting factor in suppressed bank lending. Liquidity clearly is not a constraint for banks right now.

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    1. Cool. That answers my question and solves my original puzzlement.

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    2. So, if you don't mind following up, did you originally misunderstand my position, or do you still believe that my position is in error?

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  6. Well, no I didn't misunderstand your position. An inability ("unhealthiness") or unwillingness to lend on the part of the banking sector is certainly one possible explanation for the household debt level reduction trends in your top data-set. It isn't, however, the only possible explanation, and I consider it the very least plausible explanation.

    But I do agree with you that household debt level leveling/expanding will contribute mightily to making NGDP look pretty again.

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