The Fed is saying it is terrible that American consumers have stopped spending. As they represent 70% of the economy, how can this NOT have a a huge effect? But one of the important parts of this spending- credit – has dried up. Even good credit card customers now have 30% interest rates and multiple fees. Even good customers never know if their credit card is going to be canceled without notice.
What do the bank management teams think, that the consuming people are just stupid? Consumers are not stupid. Their reactions are to stop using credit. They put away their credit cards, they pay cash, they put off purchases. This does not take a brain surgeon to figure out, and in the long run is better for the individual consumers. But as Japan has shown, and China is showing, this can lead to a stagnant economy that gets dangerously out of balance. Of course the spending has to be “measured” spending, but if too many stop spending altogether a floundering economy has difficulty recovering.
What then is the reason the for huge decline in credit availability (at least at anything close to reasonable rates)? Why do the banks insist on doing this? Several reasons: greed, short term thinking, they currently have alternative investments that can provide the returns they need, and there really is no competition of note.
No one in corporate American management wants to accept what used to be a “decent ” return any more. If it is not 15% profit and 15% growth “15-15″ – they are not interested. That means banks (and insurance companies, and other firms that used to be slow growth) have to have growth of 30% a year! Put another way, they have to have one dollar in every three either incremental or net profit. This is the lofty rate that was once reserved for high-flying – and risky – tech companies. Maybe for a few years banks or insurance companies can maintain that, but after a while it is not sustainable without massive abuse of customers and suppliers and a particularly vile form of acquisition mania that does not account for long term profitability. Which leads us to the next point.
The banks suffer from the same syndrome most of American corporate management seems to. The average CEO is a) in the job for about two years and b) compensated quarterly, or at worst (best?) annually. This means they are not only focused on the short term; it means that long-term planning (a five year horizon) is done casually, as in given lip service, or is not done at all. They do it to look good for the shareholders, but it is not where their bread is buttered. It is said “it will only get done if you measure it or count it.” If the only measure for management is short-term, when they do nothing else how can we be surprised?
The bankers currently have alternatives for making money. The TARP bucks have filled their coffers, they have international investments, and are playing the derivatives market like mad. For the moment, they don’t need or want the hassle of a “retail” customer. (Even if they say they do. Wells Fargo is aggressively going after consumers – but the rates are so high they can’t say no.)
The big banks, like most big businesses in America, operate as an oligopoly. They do not need to sit in a cigar smoke-filled back room to fix prices; they need only to look at the internet each day. The little banks have been swallowed up or are so local they really don’t make a difference. Credit unions are such a small percentage of the market they are not even a rounding error to the banks.
Oh, and there is another reason. They can. No institution of oversite group tells them they can’t. So they will. And have. And are.
Posted by jim4mesa 
