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For release on delivery
10:00 am EDT
June 9, 1994

Statement by
Lawrence B. Lindsey
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Credit and Insurance
of the
Committee on Banking, Finance and Urban Affairs

U.S. House of Representatives
June 9, 1994

Mr. Chairman, I am pleased to appear on behalf of the Board
of Governors of the Federal Reserve System to address issues
related to consumer credit.

I will focus my prepared remarks on

the questions you raised in your letter of invitation.
Let me begin with some background.

Two months ago, the

United States economy entered the fourth year of its current

While this expansion began on a sluggish note,

economic growth has been appreciable, on average, since early

For example, real gross domestic product (GDP) expanded

3.9 percent during 1992 and 3.1 percent during 1993.

During the

first quarter of this year it rose at an annual rate of 3.0
percent, in line with the expectations of growth for this year
given in February by the members of the Federal Open Market
Committee (FOMC).
This economic expansion has resulted in moderate, but still
healthy, job gains and falling unemployment.

We can all be

pleased with the decline in the unemployment rate to 6.0 percent
in the latest survey by the Bureau of Labor Statistics.
As is usually the case, changing spending patterns in the
household sector have been key to the expansion.

For example, in

inflation adjusted terms, the increase in personal consumption
expenditures has amounted to 71 percent of the expansion in Gross
Domestic Product since the recovery began in the second quarter
of 1991.

If anything, the importance of consumption has

increased as the recovery progressed.

Since the first quarter of

1993, increased consumption has accounted for 77 percent of the
expansion in overall GDP.

By contrast, during the economic

expansion from 1982 to 1990, consumption growth was responsible
for just 68 percent of the growth in GDP.
Investment in residential real estate showed a similar

During the current expansion, housing has accounted for

16.4 percent of the growth in GDP.

During the 1980s expansion,

increases in housing represented only 6.2 percent of the increase
in GDP.

Combining these two categories of household outlays,

therefore, shows the importance of the household in the current

The growth in personal consumption and housing

investment constituted 87 percent of GDP growth since the
expansion began, compared with 74 percent during the 1980s.
Thus, the questions you asked, Mr. Chairman, about the financial
health of the household sector and its continued access to credit
are particularly pertinent in today's economic environment.
As is usually the case in economic expansions, higher levels
of household debt have helped finance increased activity.


policy makers, we should recognize that households are the best
judges of their own financial circumstances, so we should not
view these increased levels of debt as necessarily "good" or

Increased levels of household income, more optimistic

attitudes toward employment prospects, and generally favorable
conditions for borrowing are all contributing to the recently
increased willingness of households to take on debt.
The first question in your letter asked about recent growth

in consumer credit and how it compares with past expansions.


is important to consider the various types of consumer credit.
The Federal Reserve has just released its report on consumer
installment credit.

In April, installment credit grew at an

13.2 percent annual rate, following a revised 12.6 percent rate
in March, slightly higher than the 11.2 percent growth during the
fourth quarter of last year.

It is certainly well above the

full-year growth of 6-1/2 percent in 1993 or growth in 1992 of
just 1 percent.

Indeed, the double-digit pace reached over the

past half year or so is the most rapid since the third quarter of
Nevertheless, it is hard to determine conclusively how the
current rate of credit expansion compares to historical norms.
Recall that we are now in the fourth year of an economic upswing.
As the above data indicate, installment credit growth was quite
subdued during the early portions of the current expansion.


makes qualitative comparisons of current growth with that in
comparable earlier time periods somewhat problematic.


resurgence in consumer installment credit has come later than
usual in the current economic expansion, and the recent pace has
still been well below peak rates reached during some earlier
expansion periods.
Typically, installment credit starts to climb in the first
or second quarter of a recovery, and is generally rising quite
sharply by the second year, often reaching growth rates of 15 to
20 percent at some point in the cycle.

In contrast, during the

most recent upturn in the economy, installment credit continued
to contract through the fifth quarter of recovery; its growth
rate did not reach double digits until October of 199 3, two and
one half years into the recovery.

On the other hand, the

household sector entered this expansion with a higher level of
debt than it had in the past, making comparison of percent
increases difficult.
We should bear in mind that swings in consumer credit growth
are wider than fluctuations in the economy as a whole because
consumer credit is used most heavily to finance purchases of
durable goods, which are much more cyclical than consumer income
or total consumption.

Durable goods include autos and large

consumer appliances, which often move with home sales.


strength in these two sectors has meant that durables have been
particularly important in the present expansion contributing to
25 percent of increased GDP, compared with just 16 percent during
the 1980s' expansion.
The comparability of the data on credit growth is also
somewhat limited by the development of alternative means of
finance. Changes in consumer tastes, the marketing of financing
alternatives, and the tax environment all can affect the
composition of consumer credit.

For instance, the phasing out of

tax deductibility of interest payments on non-mortgage consumer
loans after 1986 has prompted some shift towards more use of home
equity credit and less of traditional consumer loans.


tailoring and promotion of auto leasing to individual consumers

has provided them with another means of acquiring cars that has
considerable appeal for some types of consumers.

I would not

want to overstate the impact of these alternatives -- estimates
made by the Board staff indicate that shifts to these forms of
financing have trimmed from one to three percentage points off
the growth rate of consumer installment credit in recent years -but such considerations do muddy the comparisons a bit.
A similar type of credit product change which makes
comparison across business cycles difficult has been the
development and spread of general purpose credit cards for
individual consumers during the past few decades.

From less than

$10 billion in 1970, debt outstanding on bank credit cards has
grown to more than $200 billion today.

Revolving credit,

including retail store cards as well as bank cards, is now the
largest component of consumer credit, recently surpassing auto
How this development affects consumer balance sheets is
somewhat unclear.

A considerable amount of this revolving credit

is commonly called "convenience credit" because it is repaid by
consumers within an interest-free grace period.

Whether one

should view convenience credit as debt in a true sense is open to
question, but to the extent that convenience credit is on a
creditor's books on the last day of the month, it will be
included in our measure of consumer credit.

The contribution of

convenience use to credit growth takes on more importance these
days as people run more expenditures through their cards to rack

up frequent flier mileage or points toward purchase of an

Overall credit market conditions also affect the

consumer's choice of debt and makes historical comparison

For example, efforts to trim debt during the early

1990s and the early part of this expansion were probably
reinforced by historically wide spreads between interest rates
consumers were paying on existing loans and the interest rates
they could earn on new financial assets.

In response to these

wide spreads, some people elected to pay down debts with maturing
assets rather than roll them over at extremely low yields.


example, a consumer with a maturing certificate of deposit
yielding 8 percent might choose to pay off a 10 percent car loan
with the funds when new certificates of deposit yield only 3 or 4

In essence, these spreads represent the cost of

household liquidity, and households elected to assume less liquid
positions, reducing levels of both debt and of financial asset
holdings as a result of this increased cost.

Again, the lack of

comparability of these developments with other business cycles
makes an evaluation of consumer debt positions difficult.
In sum, these factors seem to have come together in recent

The pattern of durable goods consumption has turned

stronger, providing a stimulus to the growth of installment

Healthier consumer balance sheets, resulting from both

the earlier slowdown in growth of mortgage and consumer debt and
substantially lower average interest rates on the stock of debt,
have probably made individuals feel more comfortable about taking

on debt again.

In addition, heavy promotion of credit cards with

rebates and other incentives tied to the volume of transactions
has apparently boosted growth in this area.
As I have indicated, comparisons of growth rates over time
are complicated.

Sifting through all these considerations, I

think it is fair to say that the strength in consumer credit seen
so far is not out of line with historical patterns.

We also need

to look at the ability of households to support the debt.


stock of mortgage and consumer debt relative to income is
historically high, and has begun to rise a bit with the recent
rebound in debt growth after it had leveled off for several
On the other hand, debt-servicing payments -- covering both
interest and principal - - relative to income suggest a net
decline in burden.

Our staff's estimate of the share of

disposable income allocated to scheduled principal and interest
payments by the end of last year had fallen appreciably from the
beginning of the decade.

This decline resulted from the slowdown

in borrowing as well as to lower borrowing costs, especially
those resulting from the surge in mortgage refinancing that
accompanied declines in mortgage rates to historically low

More recently, as household debt growth has strengthened

and interest rates have turned up, debt service payments perhaps
have edged up.
The prospective risks this might pose are probably best
determined by direct measures of debt payment performance.


this regard, delinquency rates on consumer and mortgage loans
have suggested for some months now that the risks associated with
debt burdens have diminished.

According to both industry data

from the American Bankers Association and calculations from bank
call reports, consumer loan delinquencies have been on the
downswing since at least early 1992.
The ABA series for all loans combined dropped in the fourth
quarter last year to its lowest level since the first quarter of

Similar evidence is provided by data on past-due auto

loans at the auto finance companies and on past-due home
mortgages reported by the Mortgage Bankers Association.


bankruptcies, although still historically quite high, have also
been declining in recent months.
Nonetheless, looking below these aggregate statistics, there
are reasons to believe that some households have not made much
progress in relieving debt burdens.

As I have remarked

elsewhere, there is some evidence to suggest that middle income
households, who carry the bulk of household debt, may not have
shared fully in recent income growth and thus in the improvement
in aggregate debt-servicing burden.
Your second question dealt with the availability and
affordability of consumer credit.

Availability of credit -- the

relative willingness of creditors to make loans to consumers at
specified interest rates -- has increased.

For instance,

responses to the Federal Reserve's Senior Loan Officer Opinion
Survey indicate that banks have become progressively more willing

to lend to consumers since shortly after the end of the recession
in 1991.

Major new credit card plans have been offered within

the past two years, such as the joint ventures between card
issuers and the major auto manufacturers.
Many factors can affect the availability of consumer credit.
Earlier in the decade, the balance sheet strains experienced by
financial institutions resulting from heavy recession-related
loan losses and the need to meet stricter capital requirements
restrained the availability of consumer credit, just as they
limited the supply of other types of credit.

The profitability

of consumer lending remained relatively attractive, however, and
this type of lending was probably curtailed less than some other
types, such as commercial real estate.
The development in recent years of a secondary market for
consumer loans through securitization of auto loan and credit
card receivables has also been a net plus for credit availability
to consumers.

Securitization has enabled banks and other

traditional lenders to households, such as auto finance
companies, to continue to originate consumer loans even when they
were unable to profitably fund these credits themselves.


has brought new lenders into the market as indirect suppliers of
credit, reducing the vulnerability of this source of credit to
the occasional difficulties of traditional lenders.
An important component of the affordability of consumer
credit is the interest rate charged on consumer loans.
know, these rates have come down substantially.

As you

Auto loan rates

at banks averaged about 11 percent in 1991, but had dropped to
7-1/2 percent on average by the first quarter of this year.
rate is dramatically lower than it has been historically.



previous record low was 10 percent, and occurred in 1972, the
year the series was begun.

As a result, the affordability of

automobiles is at an historical high.

Or put another way, debt

payments on a new car relative to income are historically low.
With regard to revolving credit, our series on credit card
rates, which typically has shown very little movement, dropped 2
percentage points from its recent high in early 1991.


our credit card series may not fully take into account the
increased variety of terms that have emerged in this area.
Market segmentation has significantly complicated the analysis of
effective credit card rates.

In all likelihood, the reduction in

effective rates to credit card holders is greater than our survey
would suggest.
The third question in your letter requires us to look ahead.
In my judgment, prospects for the availability and affordability
of consumer credit are likely to remain quite favorable.


this year, members of the Federal Open Market Committee
anticipated further solid gains in output and income in 1994, in
the neighborhood of 3 percent or so, a view that appears to have
been confirmed by the evidence to date.

Also, private

forecasters continue to expect growth of around 3 percent this

In this context of continued economic expansion, and given

the stronger position of banks and other lenders, mortgage and

consumer credit should generally be in ample supply.


situation will be buttressed by the continued development of
active markets for securitized mortgages and consumer
The final question in your letter of invitation raised
questions about interest rates on consumer deposits and whether
they are unusually low in relation to market rates by
historical standards.

It is important to note that historical

comparisons of deposit rates can be tricky, in part because
retail deposit rates were subject to interest rate ceilings prior
to the 1980s.

Financial market deregulation and innovations

during the 1980s have clearly brought tremendous gains to savers,
particularly those who rely on typical consumer accounts.
It should be kept in mind that rate spreads have been
affected by greater regulatory costs imposed on banks and thrifts
in recent years, notably higher deposit insurance premiums.
Still, the evidence shows that rates on NOW accounts, savings
deposits, and money market deposits have been very sticky.


have been especially slow to respond to upward movements in
market interest rates, although they have also been sluggish in
the downward direction.

In 1991 and 1992, when market rates of

interest were coming down, rates on these accounts dropped less
rapidly, making them quite attractive in relation to market
instruments, such as Treasury bills.

Rates on these bank deposit

accounts continued to fall last year as they completed the
adjustment to the earlier declines in market rates.


By contrast,

these rates currently appear to be sticky in an upward direction.
In part, this stickiness may reflect costs associated with
changing such deposit rates.

These costs may be both internal

administrative and market based.

Holders of these accounts seem

to expect stability in rates and are prone to close accounts and
move balances elsewhere when deposit rates are cut.

In recent

years, when market rates declined to the historically low levels,
bankers appeared reluctant to drop rates on these liquid deposits
and disturb their long term depositors in these accounts.


earlier rising rate environments, rates on such accounts lagged
earlier upward movements in market rates.

Banks and thrifts had

been unwilling to raise rates on these accounts as costs would
have risen for all accounts, not just new ones.

Taking this

historical pattern of stickiness into account, rates on these
types of deposits do not appear to be noticeably out of line with
previous experience.
In the case of retail CDs, rates have typically adjusted
quite promptly to movements in market interest rates.

Unlike the

liquid accounts just discussed, adjusting the rate on such time
deposits in keeping with movements in market rates does not
immediately affect the whole cost structure of time deposits,
only the cost of new deposits and roll-overs.

Rates on retail

CDs, nonetheless, appear to have been on the low side of
historical norms over the past year or so perhaps in part because
loan demand had been rather weak.

In recent months, though, loan

demand has firmed and rates on retail CDs have been rising

steadily as banks have needed to raise funds.
In conclusion, Mr. Chairman, the recent strengthening in
consumer credit can be viewed as another piece of evidence that
the economic expansion is firmly in place.

Credit to households

appears to be quite readily available and many households, having
completed substantial adjustments to alleviate debt-servicing
strains, are showing that they are again willing to borrow to
finance spending.

Moreover, changes in our financial system,

notably the securitization of mortgage and consumer debt, will
better ensure that credit supplies are not disrupted by the
financial difficulties of any segment of the financial services

I would be happy to answer any questions you might