Transcript Slide 1

Consumer Finance Issues in the
Wake of the Great Recession
Richard M. Todd
Vice President, Federal Reserve Bank of Minneapolis
Pathways to Financial Success Conference
Wisconsin Dells, WI
June 16, 2011
The views expressed here are Mr. Todd’s and not necessarily those of the Federal Reserve
Bank of Minneapolis or the Federal Reserve System
Overview
After the bursting of an asset and debt boom, Extension
professionals have an important role to play in helping
many households adjust to life with less wealth, less
credit, reduced income, and significant uncertainty.
• Boom: Asset appreciation boosted wealth and debt
• Bust: Falling asset prices, debt problems, recession
• Recovery: Slowed by wealth and job losses, debt
problems, and uncertainty
• Extension: Help families and communities recover
2
Key Features of the Boom
• Household asset values and debt both surged
• Financial institutions increased leverage and
added off-balance-sheet exposures
• Government budget exposures mounted,
many of them also off-balance-sheet
• Result: High risks and vulnerabilities
• Government policy and regulation contributed
– Subsidies and guarantees
– Regulatory avoidance
3
Housing Appreciation Accelerated till 2006
(FHFA Index, 1991=100)
Source: Federal Housing Finance Authority, Seasonally-Adjusted Purchase-Only Indices (1991Q1=100)
4
Consumer Debt Peaked in 2007
(household and nonprofit liabilities as % of disposable income)
Source: Federal Reserve Board of Governors, Flow of Funds, Table B.100
5
Role of Government Policy & Regulation
• Subsidies and guarantees
– Tax treatment of mortgages
– Deposit insurance
• Regulatory avoidance
– “shadow bank” system
– “too big to fail”
• Large or complex banks and insurance companies
• Fannie and Freddie
• Regulatory failures
6
Key Features of the Bust
• Falling household asset values led to delinquencies
• Financial institutions deleveraged and sought safe
liquid assets, triggering a shadow bank run and
disrupting the whole world economy
• The Great Recession, with big adjustments for
households, financial institutions, and
governments, ensued
• Government borrowing surged, with “bailouts”
small compared to loss of tax revenue and safety
net and stimulus spending
7
Housing and Stock Prices Plunged
8
Household Net Worth Plummeted
Source: Federal Reserve Board of Governors, Flow of Funds, Table B.100
9
A Financial Run Ensued
• By 2008, some large lenders
were failing
• Investors feared more risks,
cut short-term loans
• Fed, Treasury, FDIC
intervened massively to calm
the “shadow bank” run
• Still, the volume of shortterm funding and assetbacked lending fell sharply in
late ’08 and early ‘09
Rate spread: 1-month Euro$
deposits over U.S. Treasuries
For more details, see Niel Willardson and LuAnne Pederson, "Federal Reserve Liquidity Programs: An Update"
at www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4451
10
Financial Woes Help Turn a Recession
into the Great Recession
Source: http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/index.cfm
11
part three
• Boom: Asset appreciation boosted wealth and
debt
• Bust: Falling asset prices, debt problems, recession
• Recovery: Slowed by wealth and job
losses, debt problems, and uncertainty
• Extension: Help families and communities recover
12
Goal: Get Back to Trend Growth
Source: Robert E. Lucas, Jr. “The Recession of
2007-201?”
www.econ.washington.edu/news/millimansl.p
df
Source: Robert E. Lucas, Jr. “The Recession of 2007-201?” www.econ.washington.edu/news/millimansl.pdf
13
We’ve Got a Big Gap to Make Up
Source: Robert E. Lucas, Jr. “The Recession of 2007-201?” www.econ.washington.edu/news/millimansl.pdf
14
Rising Income Is Lifting Spending Some
(and equipment/software investment, manufacturing and trade)
15
But the Job Market Is Still Lagging
For comparable data: www.minneapolisfed.org/publications_papers/studies/recession_perspective/index.cfm
16
Recovery Held Back by HH Losses,
Debts, and Uncertainties
• Wealth Loss from Asset Price Declines
– Housing
– Equities
• Unemployment and Income Loss from Recession
• Mortgage Stress
– Under water
– Delinquent
– Foreclosed
• Uncertainty
17
HH Wealth Losses Were Significant
•
•
•
•
•
•
•
•
•
Median wealth down: $125K in ’07; $96K in 09
Mean wealth down: $595K in ‘07; $481K in ‘09
Median % change was an 18% decline
Wide diversity across families
Wealth fell >50% for a quarter of families
Wealth rose >25% for a quarter of families
Asset value declines biggest factor, esp. homes
Wealthiest lost most in $; leveraged lost most in %
Losses largest in the West, lowest in Northeast
Source: Bricker et al., “Drowning or Weathering the Storm,” NBER WP 16985
18
Recession Added Unemployment &
Income Cuts on Top of Wealth Losses
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession." www.newyorkfed.org/research/staff_reports/sr482.html
19
Mortgage Problems High, Esp. for Young
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession." www.newyorkfed.org/research/staff_reports/sr482.html
20
Mortgage Debt Problems Are High in WI
% of Active Loans 90+ Days Delinquent or in Foreclosure
(Source: Lender Processing Services Applied Analytics)
See http://data.newyorkfed.org/creditconditions/
21
Most Unemployed Have No Mortgage, But
Those Who Do Are More Frequently Behind
[Distribution of Ownership and Mortgage Status (2008-09),
by Unemployment Status of Respondent/Spouse]
Source: Hurd and Rohwedder, “Effects of the Financial Crisis and Great Recession on American Households.” NBER WP 16407 22
Finding a Job Has Taken a Lot Longer
Source: www.bls.gov/opub/ils/pdf/opbils89.pdf
23
Policy Uncertainty Is High and Reflects
Our Fundamental Disagreements
• “Two Sets of Standards, One Big Muddle for SIFIs”
American Banker 7 Jun 2011
• “Bernanke Agrees With Dimon That Dodd-Frank Rules Unclear”
“
Dow Jones News Service 13 Jun 2011
• “Geithner Wants Global Rules on Derivatives”
The Wall Street Journal Online 07 Jun 2011
• “Clock Ticking On New Rules”
•
The Wall Street Journal 7 Jun 2011
• "Tarullo Speech Stokes New Fears on Basel Capital Surcharge"
American Banker 10 Jun 2011
• “The Uncertainty Tax”
Thomas Friedman, New York Times 12 Jun 2011
• "ECB Stands Firm on Greek Debt"
The Wall Street Journal 10 Jun 2011
• “California Voters Balk at Tax Plan"
The Wall Street Journal 09 Jun 2011
• “Talks on Debt Limit To Heat Up Next Week”
New York Times, 10 Jun 2011
• “Yes We Want To Cut the Budget. Just Not That Part”
New York Times, 12 Jun 2011
24
Many Families Were Financially Stressed
(unemployed, neg. equity, 2+ arrears on mortgage, or in foreclosure)
Source: Hurd and Rohwedder, “Effects of the Financial Crisis and Great Recession on American Households.” NBER WP 16407 25
Budgets Often Stressed or Vulnerable
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
26
Overall, Losses Led to More Savings
Note: Annual averages shown. For April 2011, the savings rate was 4.9%
27
On Average, Families Cut Food and
Out-of-Pocket Health Care Spending
Source: Hurd and Rohwedder, “Effects of the Financial Crisis and Great Recession on American Households.” NBER WP 16407 28
Stressed HHs Cut Spending More Deeply
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession." www.newyorkfed.org/research/staff_reports/sr482.html
29
Unemployed Reduced Savings Too
(Where respondent or spouse unemployed, May ‘09 to April ‘10)
Source: Hurd and Rohwedder, “Effects of the Financial Crisis and Great Recession on American Households.” NBER WP 16407 30
Income/Job Loss Cut Retirement Saving
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession." www.newyorkfed.org/research/staff_reports/sr482.html
31
1 in 13 Wisconsonites Took a Hardship
Withdrawal (mid ‘08 to mid ‘09)
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
32
part four
• Boom: Asset appreciation boosted wealth and debt
• Bust: Falling asset prices, debt problems, recession
• Recovery: Slowed by wealth and job losses, debt
problems, and uncertainty
• Extension’s Role: Help families and
communities recover
33
Many Households Want To Act Prudently
(Intended Response to Abnormal Income)
Response to 1-Yr. 10 % Increase
Resp)onse to 1-Yr. 10% Decrease
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession.“ www.newyorkfed.org/research/staff_reports/sr482.htm
34
Many Households Know Why To Save
(Households’ “Very Important” Reasons to Save)
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession.“ www.newyorkfed.org/research/staff_reports/sr482.htm
35
But Many Report Reasons to Cut Savings
(% listing reason as moderately or very important, Nov. 2009)
Chakrabarti, et al., "Household Debt and Saving during the 2007 Recession.“ www.newyorkfed.org/research/staff_reports/sr482.htm
36
Few Are Happy with Where They Stand
(Wisconsonites’ Satisfaction with Their Financial Condition, 2009)
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
37
Households Have Reduced Debt
(Financial Obligations and Key Components, as % of Disp. Income)
Source: Federal Reserve Board -- www.federalreserve.gov/releases/housedebt/default.htm
38
HH Delinquency Still High but Falling
Source: www.newyorkfed.org/creditconditions/
39
Issues w. Credit Card Debt Common
(mid 2008 to mid 2009)
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
40
Many High and Low Credit Scores in WI
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
41
Lack of Credit Self-Knowledge
Accompanies Significant Income Risk
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
42
Savings and Planning Fall Short
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
43
Insurance Gaps – It’s Not Just Health
(households w/o insurance, by type)
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
44
About 1 in 30 Wisconsonites Unbanked
(among those whose responded)
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
45
Use of Alt. Financial Services Goes
Beyond the Unbanked (mid ‘04 to mid ‘09)
Source: FINRA Financial Capability Study, www.finrafoundation.org/programs/p123306
46
Summary of Extension’s Roles
• Help families
–
–
–
–
–
Resolve debt problems and rebuild credit access
Make new plans after wealth and job losses
Budget and save successfully
Maintain or enhance financial services access
Retrain and maintain earning power
• Helping communities deal with
–
–
–
–
Lower trajectory for consumer spending
Vacant or under-used properties
Government and nonprofit budget cuts
High demand for workforce training
47
Federal Reserve Resources
www.federalreserve.gov/communitydev/default.htm, and
www.federalreserve.gov/consumerinfo/foreclosure.htm
48