Americans cut back on using their credit cards in March, suggesting many were reluctant to take on high-interest debt to make purchases.
Consumer borrowing rose just $8 billion in March from February to a seasonally adjusted $2.81 trillion, the Federal Reserve said Tuesday. It was the smallest increase in eight months.
The gain was driven entirely by more loans to attend school and buy cars. The category that measures those loans increased $9.7 billion to $19.6 trillion.
A measure of credit card debt fell $1.7 billion to $846 billion. That's 17.2 percent below the peak of $1.022 trillion set in July 2008.
Since the recession, consumers have been more cautious about using credit cards. Economists believe consumers will stay cautious this year, in part because of an increase in Social Security taxes that has reduced tax-home pay for most Americans. The trend seen in recent years continues: Americans who lost jobs or recent graduates who can't find work have returned to school and are taking out loans to pay for their education.
Student loan debt has been the biggest driver of borrowing since the recession ended in June 2009. Student loans reached $966 billion in last year's fourth quarter. That's up from $675 billion in the second quarter of 2009, when the Great Recession was ending.
Consumers increased their spending from January through March at the fastest pace in more than two years. However, they had to trim the pace of their savings to finance the faster spending. Their after-tax income dropped by the largest amount since the final three months of the recession in 2009. Part of the drop in after-tax income reflected the increase in Social Security taxes that took effect in January.
A person earning $50,000 a year will have about $1,000 less to spend this year. A household with two highly paid workers will have up to $4,500 less.
Solid hiring could offset some of the drag from the tax increase. The economy added 165,000 jobs in April and hiring in the two previous months was better than previously reported. That helped drive the unemployment rate down to a four-year low of 7.5 percent in April.
During the crazy days of the housing bubble in 2006, bankers created a bond called MABS 2006-FRE1. The instrument gave buyers the right to payments on the subprime housing loans of nearly 2,000 borrowers, including Stephen Monzione, a professional wedding photographer in New Hampshire.
Six months after the security was issued, a trader called it a "crap bond." Monzione, with a monthly income of about $900 and mortgage payments of $927.22, eventually stopped paying. So did hundreds of other people. The bank that originated the loans went bust. The bond's value crashed to 16 cents on the dollar.
Today, the subprime bond is rising from the ashes. The subprime borrower isn't.
A hedge fund manager in Colorado snapped up MABS 2006-FRE1 last summer and more than doubled his money in four months, thanks to a surge of investment into financial markets by the Federal Reserve.
The U.S. central bank hasn't been as helpful to Monzione. The 60-year-old lost a foreclosure battle and must be out of his home by the end of July.
"God bless them," Monzione marvels at the traders who flipped the bond of which his loan was a part. "I don't have a clue about what the hell that means to me personally."
Monzione has put his finger on a strange disconnect. Some 57 percent of borrowers' loans in MABS 2006-FRE1 are delinquent by 60 days or more, but the bond came roaring back nevertheless. Curiously, its recovery had little to do with the real-world fates of the individuals behind the bond.
The seeming paradox is one of the consequences of the Federal Reserve's policy of "quantitative easing" - an attempt by the U.S. central bank to help spur the economy by buying assets to generate huge volumes of cheap credit. The Fed campaign has been under way since the crash of last decade's housing bubble - which itself was inflated by a prolonged period of easy money meant to alleviate an earlier crash, the stock swoon of 2001.
The Fed's current program is indeed helping matters greatly, by shoring up banks and lowering the borrowing costs of corporations and home buyers who have good credit. But it is also giving rise to unintended consequences: new asset bubbles that are mostly benefiting well-heeled investors.
"FUNDAMENTAL DETACHMENT"
Under the third and latest round of its stimulus, nicknamed QE3 by traders, the Fed each month is buying $40 billion worth of high-quality mortgage securities (and $45 billion of longer-term Treasury securities). The idea is partly to drive interest rates lower on home loans, and partly to prod investors into other kinds of risk-taking activity that can create growth. Home loans are indeed cheap and sales are firming up in much of the United States.
But the Fed is also encouraging speculative fevers. Its massive purchases of mortgage securities have driven prices so high, and yields so low, that investors have scampered into riskier securities - like the MABS 2006-FRE1 bond. Thanks in part to the Fed's bond buying, the value of subprime bonds - a $300 billion market - jumped 21 percent between last spring and this March, according to Amherst Securities.
The overarching goal in playing the bond markets has been to stabilize the financial system and maximize employment. He has tripled the central bank's asset holdings since the peak of the financial crisis in September 2008. The Fed said last week that it would increase the purchases if needed to shore up the economy.
Quantitative easing, however, is a blunt instrument that can do little to directly help people at the bottom of the economy. Such aid is easier to deliver through fiscal policy and legislative relief - for instance, jobless benefits or debt-reduction programs. But as the Fed has been stepping up its stimulus, federal and state governments have been cutting spending. Corporations have been hesitant to invest and hire.
As a result, the recovery is spotty. The unemployment rate in April was 7.5 percent, the Labor Department said Friday. That's down from a high of 10 percent in 2009, but the number of people with jobs still hasn't recovered to pre-crisis levels.
Wolfeboro, where Monzione lives, is a summer resort town on Lake Winnipesaukee. A home called Lakeside Manor, where former French President Nicolas Sarkozy stayed in 2007, is listed for sale at $13.6 million. Mitt Romney, last year's Republican presidential candidate, has a home by the lake, too. During the campaign, he made pancakes there for a TV news show.
Monzione's house is a converted barn in the less desirable middle of the town, a few blocks from the lake. He wouldn't have been able to buy the place were it not for last decade's housing boom and an inheritance from his parents in 2005. He had his share of troubles before that, some self-inflicted, including divorce, bankruptcy and a drug addiction. (He says he went clean in April 1996.)
In 2005, when he decided to buy a house, his credit score was 532. A score of 640 or less is considered subprime. Still, Monzione wasn't among the many Americans who put no equity into his house. He did just the opposite.
The property, a "real fixer-upper," cost $130,000. A mortgage broker arranged for Monzione to get a $100,000 loan from Fremont Investment & Loan, based in Brea, California. He used $30,000 from his inheritance for a down payment, and made another $30,000 in repairs.
"I thought this is where I was going to stay forever," he said.
He figured the income from his wedding and studio photography business and a disability payment would cover the monthly mortgage bill. But he ignored the fine print. The mortgage had an adjustable rate, which meant payments would rise, stair-step, from $754.79 to $894.90 to a peak of $927.22 over the ensuing three years.
Ailments requiring stomach and sinus surgeries ate into his finances. Meanwhile, the advent of digital cameras hurt business. To make up for lost income, he turned to scouring estate sales for antiques and housewares to sell on eBay. It wasn't enough. The mortgage ate up almost all his income.
The housing market has been recovering in parts of the country, and many homeowners have been able to refinance their loans at low rates, a product of the Fed's stimulus. But as in much of America, the comeback is uneven in Carroll County, of which Wolfeboro is a part. The number of homes sold rose 18 percent in 2012, but median sale prices stayed flat at $180,000.
