Statement by Lawrence B. Lindsey - Statements to the Congress - Board of Governors, Federal Reserve System - Transcript

Federal Reserve Bulletin, August, 1994

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, such as the joint ventures between card issuers and the major auto manufacturers, have been offered within the past two years.

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. This 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. As you know, these rates have come down substantially. 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. This rate is dramatically lower than it has been historically. The previous record low was 10 percent and occurred in 1972, the year the series was begun. As a result, the affordability of automobiles is historically 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. However, 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. Earlier this year, members of the Federal Open Market Committee anticipated further solid gains in output and income in 1994, about 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 about 3 percent this year. 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. This situation will be buttressed by the continued development of active markets for securitized mortgages and consumer receivables.