Chart of the Day: Government's Growing Role in Consumer Credit

Banks are lending again. That's what we've been hearing over the past few years. Even though credit card balance had generally been declining until very recently, nonrevolving consumer loan balances, like those for cars, boats, vacations, and education, have been rising consistently since July 2010. In 13 months since then, nonrevolving balances have grown 5.3%. But this was due entirely to the government's aggressive acquisition of student loan debt.

Here's a chart based on Federal Reserve data released this week. It shows nonrevolving consumer debt held by various different sorts of institutions since 2005 (real estate-related debt is not included):

consumer credit holders 2011-07.png

Let's go through each of these lines briefly, because each tells a story.

  • Commercial Banks (blue line): We've seen a strange path here. The financial crisis halted the growth of their credit holdings for a while. Then in the early 2010, their balance ticked up again, only to quickly plateau at a new level. It then dropped even below 2009 levels in late 2010 and has been growing very slowly since.
  • Finance Companies (purple line): The financial crisis took a serious toll on finance companies. After peaking in 2008, their nonrevolving balances haven't nearly recovered. They continue to slowly decline, with a few seasonal bumps along the way.
  • Government (red line): This is the most remarkable story told by the chart. The government has become a major consumer creditor since the financial crisis hit. Its balance regularly hovered around $100 billion through late 2008. But then it started growing -- fast. Since 2009 began, about two-and-a-half years ago, its consumer credit balance has grown by $275 billion or 248%. Over the same period, the balances of all other holders declined by $227 billion or 15%. (more on this later)
  • Credit Unions (pink line): Interestingly, credit unions kept their balances steady through the financial crisis. But as unemployment began to climb, their consumer credit holdings began to slowly decline.
  • Securitized Pools (orange line): This is another really fascinating line on the chart. As you probably know, securitization played a pretty significant role in the financial crisis. Since then, the industry hasn't really been the same -- even outside real estate-related asset-backed securities. Since consumer loans bundled into bonds peaked in early 2007, they steadily declined. Standing at a mere $75 billion in July, they're just a fraction of what they were at their peak.
  • Savings Institutions (green line): The narrative here is similar to the story for credit unions. But their decline has been a little bit steadier over the period shown.
  • Nonfinancial Businesses (brown line): Nonfinancial firms remain one of the least significant holders of credit. Their consumer credit portfolios have remained fairly static over this period.

The big, big story here should be clear: the government has become a major player in the consumer credit market. At this time, it is the third most significant holder of nonrevolving debt. If its rapid growth continues, then it will soon surpass finance companies and could even challenge commercial banks to grab the top spot.

What is going on here? Why did the government get into the consumer credit business in such a big way? In fact, all of this debt is of the same kind: it consists of student loans.

The aggressive growth we're seeing here is for two reasons. The government began to ramp up its student loan holdings after the financial crisis as private lenders pulled back. But in 2010 it cut banks out as middle man for government-backed student loans and took over the industry entirely. The second reason for the expansion, however, is just growth in student loans. They have been on a very rapid growth trajectory, up 511% since 1999.

Without accounting for the government, that 5.3% gain in nonrevolving credit since mid-2010 turns into a 6.0% decline. So when you take students out of the equation, consumer credit has failed to rebound.