Chart of the day, consumer credit edition
Joe Toms of Lending Club emails me the data for this chart:
Consumer credit has been the one area that has dropped the least. Said in a nice way, this points to the structural inefficiency. A more blunt assessment is that banks have been taking advantage of consumers.
The picture is certainly striking: consumer credit rates, as measured by the Federal Reserve, fell by just 3.74 points over the period in question, while Treasuries and corporate debt dropped in yield by over 10 points. Even munis saw a much more striking fall in rates, despite the fact that their tax advantages were seriously eroded as tax rates fell.
Part of what’s going on here, of course, is that the consumer-credit universe became much less creditworthy as banks started giving out credit cards to anybody and everybody. But that’s not the whole story. We’re also seeing a move from relatively low-interest-rate personal loans to relatively high-interest-rate credit cards. And, of course, we’re seeing huge profit margins, at the banks, on consumer credit: the banks in general have done a very good job of competing on everything except lending rates.
The result is a gap in the market for innovative new online companies like Lending Club and BankSimple, all of whom in one way or another are looking to profit from those high consumer-lending rates. Given that they’ve stayed stubbornly high for the past 30 years, it’s probably fair to assume they’ll stay high for the foreseeable future.
Update: There was an error in the original chart: I’d labeled the Mortgages as Aaa bonds. Fixed now. Why were mortgages more expensive than consumer credit in 1981? I’m not sure, but it’s probably something to do with negative convexity and prepayment risk, as well as the fact that they’re much further out the yield curve.