Summary
An econometric model estimation based on the period 1995 through 2008 shows that for every 1% decline in credit (revolving and non-revolving) measured in constant 1995 $s there would be a .4 of 1% decline in consumer spending. Similarly for every 1% decline in employment adjusted by real wages, there would be a nearly 1% decline. Thus a fall in employment compounded by a decline in credit extended would cut consumer spending by nearly 1.4%.
Analysis
The extension of credit has explained the rapid growth, in face of nearly flat growth in income and slower growth in employment, over the past decade. Usurious interest rates are making it impossible for consumers and further reducing the incentive to purchase consumer products. Both the reduction in credit and the sudden increase in interest rates charged can further add to the problems faced by the economy.
If I were King, I would pass a national anti-usury law next year that would limit credit card charges to some reasonal amount over either the prime lending rate or better yet the Federal Reserve discount rate.
I would freeze exsiting limits on credit available, while at the same time offering banks funds as needed to meet oblgations under these terms at a rate just below the average rate charged.
This would open reduce the deliquincy rate, and keep the economy going.
The concept of charging people who are not able to pay even more in interest on the belief that they will suddenly find the wherewithal to pay an even higher rate is ludicrious.
Of course given the IQ of the average banker, this idea may be over there heads. The thought that they are setting rates based on "risk" assumes that they can measure risk. As the sub-prime debacle shows, they really have no idea.
