A Side Project

I got so frustrated with the amount of pre-election dreck in the comments at Calculated Risk, that I spent some spare time and late night hours over the past couple weeks and wrote a Firefox/greasemonkey script called HCN Companion.

It allows flexible control over whose comments show up. A relatively painless way to significantly increase the Signal-to-Noise ratio at Hoocoodanode.

HCN Companion

Credit Cards - Are they being paid down?

There has been some media interest in this question over the past couple weeks. The New York Times had a story about this a few days ago. In it they say that "analysts say that a significant portion of the decline is actually the result of financial institutions writing off billions of dollars in credit card debt as losses."

In fact, based on my crunching of the figures, it seems very clear that all of the decline is due to charge offs.

The first thing you need to know about credit card lending is that it's incredibly seasonal. As a group, credit card users run their balances up for Christmas and then pay most of those balances back during the next quarter. Behind this seasonality, there is a slow steady growth in balances. That growth slowed significantly in 2009, but never reversed.

So if your question is "Are people paying down their credit cards?" The answer appears to be that some people are, but not people in general.

Figures for this graph were generated from the FDIC's Quarterly Banking Profile, and the Fed's quarterly charge off figures. The impact of SFAS 167 (which brought credit card securitization trusts back onto bank balance sheets on January 1, 2010) was calculated by going through the top 20 banks' quarterly 10-Q's and generating the figures. I can't recommend that as a way to spend your time.

Adjustments to Bank Balance Sheet Items

Here's a list of the categories I have backed out of the FDIC's Quarterly Banking Profile, along with a justification.

Loans to Depositories - These are loans to other banks. If that money then gets on-lent out into the real economy, it should be covered in another category (Credit Cards, C&I, Mortgages, etc.).

Loans to Foreign Govts. - I assume that, like Elvis, this money has left the U.S. real economy building. Negligible in any case.

Treasurys - If purchased from private holders, I assume the money is recycled into some other investment. If purchased directly from the government, it makes more sense to not count it here and to track change in total government expenditures.

Equities - If purchased from private holders, I assume the money is recycled into some other investment.

Cash and due from Depositories - Cash, and loans to other banks

Fed funds sold and reverse repos - Loans to other banks

Bank premises & fixed assets - I suppose this one is arguable, since it could indicate purchases of commercial property and capital equipment that sends funds back into the real economy

Other REO - These are typically actual assets recovered from foreclosures, an intermediate stage prior to a writeoff

Trading account assets - Financial instruments assumed to be purchased from other intermediaries, or from individuals who will not spend the proceeds into the real economy

Intangibles - Balance sheet entries that result from acquisitions, again purchased from other intermediaries, or from individuals who will not spend the proceeds into the real economy

Other - This is a fairly big category, and it's impossible to tell what's in it. If I was more energetic I'd probably try to figure out whether changes here could be getting out into the real economy. However, other than an increase in Q1 2010 that I assume was caused by FAS 166 and 167, it hasn't moved much over the past couple years.

Charting the Suck - Updated

The latest Quarterly Banking Profile is out. Here's the previous graph with Q2's information added:

I'm still pondering whether my adjustments are reasonable.  I'll probably post some kind of justification for each category.  In any case,  I think it's fair to say that the trend isn't looking great.

Charting the Suck

The chart below was compiled using the FDIC Quarterly Profile and Federal Reserve Charge-Off data. I adjusted bank assets by removing any category that wouldn't result in money going into the real economy. Adjustments included bank holdings of Treasury securities, reserves held at the Fed, trading assets, and loans to other banks.

The profile data for Q2 should be released within the next few days. That should be very interesting. At the moment, I'd say it looks like we may need some more blue for the latest recession bar.

Speaking of that, Calculated Risk's instructions for adding recession bars to a chart were instrumental.

What's the Point?

If you look at the diagram of suckiness thumbnailed on the top right, you will see the "real economy" represented as a line between C (consumers) and B (businesses). The money circulating in that system is the economy's blood supply. Right now, loan payments (both principal and interest) are draining blood out of the system.

We know this because loan balances to businesses and consumers are dropping, even after we subtract writeoffs (writeoffs don't remove money from the system, only paydowns do).

The government has been giving the "real economy" transfusions via fiscal stimulus. But until bank loan books start growing, our economic body continues to be on life support. And bank loans are still shrinking. Which should be no surprise because the consumer remains leveraged to the hilt.

No growth in money supply means no growth in the economy: no new jobs, no new sales.

Looking at Fickett's Example

In my slow non-economist way, I've been pondering the following explanation of borrowing's impact on the economy (from the previously linked GDP growth is compatible with shrinking credit):

Imagine a person who has an income of $5000/month. If this person has no debt and no savings, he can spend $5000/month. Suppose, now, that he wants to spend $6000/month. He has to borrow $1000/month, so, in order to maintain a fixed spending level, his debt has to steadily increase. In this example, a change in the level of spending requires not a one-time change in the level of credit, but a change in the growth rate of credit. So, again, in this very simplified case,

* A level of spending corresponds to a growth rate of credit
* A change in the level of spending requires a change in the growth rate of credit

This gets more interesting when we look at a case where credit is shrinking. Imagine a person who is earning $5000/month, using $2000/month to pay down debt, and spending $3000/month. Next suppose that this person decides to only pay down $1000/month while spending $4000/month. Both before and after the change, credit for this person was shrinking. But it was shrinking less quickly after the change than before. Here again, an increase in the level of spending required a change in the growth of credit, in this case from more negative to less negative.

* An increase in the level of spending can come about either through an increase in the growth of credit or through a decrease in the shrinkage of credit

I believe that Fickett is guilty here of a fallacy of composition. While our hypothetical person only borrows and spends each extra $1000/month once, the money is then continually respent by others in the economy. It becomes a semi-permanent part of the money supply, and circulates. So borrowing $1000 and spending it causes $1000 worth of growth in the economy (factored by the velocity of the money).

Of course, this makes the question of why the "impulse" correlates with GDP growth even more interesting. As Biggs et al are careful to point out in their paper, correlation is not causation.