National Commentary

Nicholas F. Benton: The Consumer Credit Crunch

“We’re trying to come to grips with the end of a 20-year secular credit expansion that went parabolic in the last six years,” the chief North American economist for Merrill Lynch said on national TV yesterday.

“The U.S. economy is at the outset of the first consumer recession since the early 1990s, and it’s facing headwinds comparable to the six-quarter recession that pushed the Standard & Poors Index down 40 percent in the 1970s,” David Rosenberg said in a live interview on CNBC.

“We’ve gone from housing to credit to employment, and now I think we’re going to start to see some negative consumer spending numbers now that we’re past this fiscal stimulus program,” he went on.

This is all putting it mildly. If oil prices are falling for the moment due to a slowdown in demand, how can this be a good thing? The decline in demand means that economic activity, overall, is slowing, and that will have a nasty domino effect everywhere.

Late yesterday came the news that the giant, New York-based American International Group (AIG) reported a quarterly loss far greater than expected, hurt again by the write-down of derivatives linked to the tanking mortgage market.

It reported $5.57 billion in second quarter unrealized market valuation losses on credit default swaps, according to a CNBC staff report.

The 18th largest company in the world, with insurance and financial services in 130 countries, AIG’s malaise signals only the tip of the iceberg, like the massive write-down that Merrill Lynch did recently, and resulting in the Merrill economists’ grim outlook.

The development further aggravates and demonstrates the dual debt and credit crises that is catching the national economy, and as a follow-on, the global economy, in a vicious vice. As debt grows, banks tighten access to credit because of what’s happened to AIG and Merrill Lynch for fear of still more defaults.

The squeeze is ravaging individual families and households in the U.S., where efforts to cut spending have come years too late to relieve the burden of debt that has only continued to grow even as incomes flatten, jobs vanish, assets, such as homes or investment portfolios, lose value, and loans become unavailable.

The scariest news often comes not from Wall Street press releases, but from anecdotal reports on the ground in which, for example, a meter maid in the small vacation destination of Rehoboth Beach, Delaware finds that the number of vehicles parked on its streets, and the number of parking tickets being written, are down dramatically this summer. She’s been working there for two decades, and it’s the worst ever.

Rehoboth Beach is predominantly a middle-class, blue collar, moderately-priced and family-oriented place, drawing from working class neighborhoods in Baltimore, Philadelphia, Western Pennsylvania and Ohio.

While better-off families may be able to enjoy one more summer at their familiar destinations, many in middle-class America already can’t afford to go anywhere.

Housing experts are now saying the bottom of the market remains far off, that home prices still have to drop anywhere from 20 to 50 percent. Overall, no one is now predicting a recovery from all of this before 2010, and many say not before 2011.

What’s curious in this context is the lack of scenarios described by anyone so-called expert of exactly how a sustainable rebound will occur. Is it simply that supply and demand reach equilibrium, that enough value evaporates from the whole shebang that, somehow, bargain hunting gradually fuels a recovery?

But if primary natural resources necessary for sustainable growth, such as oil, become scarcer and more expensive in the process, how can that happen?

We may need the kind of New Deal solutions that brought the nation out of the last Great Depression. Government-financed, massive job-creating infrastructure and energy-development programs, combined with a huge across-the-board debt forgiveness, could be the only way out. Far-sighted political leaders should begin to explore what that might look like.