Rising Consumer Debt Tied to Credit Ease

by Mike Bevel, CollectionIndustry.com

I?m sure it sounded good on the Fed?s doodle pad. ?We?ll raise the fund rate from 1 to 5.25 per cent over three years, and this?ll help curb consumer-desire for credit.? It was next to a losing game of tic-tac-toe and one of those hand turkeys.

Turns out, though, not so much with the ?curbing consumer credit? part of their clever plan (and, frankly, we?ve seen better hand turkeys). Rather than decreasing, or at least leveling off, consumer debt is growing more now than at any point from 2001 to 2005.

With the rising price of gas, the increasing numbers of the medically uninsured, and out-of-control housing bubbles ? this isn?t necessarily surprising news, or, at any rate, terribly unexpected. David Moon, writing for the Tennessee News Sentinel, sees another culprit: the lending standards of many financial institutions.

As banks lower the amount of collateral required of borrowers, mini-price-wars spring up like weeds in a lawn. According to Moon, short-term interest rates have increased much more than longer-term rates. ?In this interest-rate environment, the profitability of bank lending typically declines. One reason is that the spread shrinks between banks’ cost of funds and the rates they can charge borrowers. Yet with the recent exception of mortgage activity, bank-loan profits remain high – and are still increasing.?