The far-reaching economic forces at work these days ought to be creating more cautious bankers, a veteran economist says.
Yet a big expansion of consumer credit has occurred recently amid changing business conditions that bespeak a new and less consumer-friendly economic era, notes Philip Braverman, chief economist at DKB (USA) Securities Corp., New York.
"The global economy is in a slowdown as the industrialized world increasingly invests in emerging economies to tap low-cost labor markets and in doing so piles new (productive) capacity on top of existing capacity," he says.
Besides that, jobs and incomes in developed countries are under pressure from new technology. And in the United States especially, there is the added element of declining military expenditures after the end of the Cold War.
With wages stagnant or falling in the resulting disinflationary environment, Mr. Braverman said it is hardly surprising that delinquencies for consumer loans, and mortgage loans as well, have begun rising.
"It's a basic principle of economics that human wants are insatiable," said the economist. "Banks ought to a bit more cautious right now in issuing credit cards," since consumers tend to be debt maximizers.
Top credit card issuers averaged 28% annualized loan growth in the second quarter, according to the latest data available.
"I'm not saying the banks ought to pull back at the first signs of increased delinquencies," Mr. Braverman said, "only that how they handle the expansion of credit to their customers can have a big impact on their costs and ability to continue lending."
While an economist for the American Bankers Association, Mr. Braverman conducted some of that trade group's first studies of bank profitability, as well as of installment lending and mortgage lending.
From a larger perspective, he sees signs that "the supposed American dream, while not dying, is certainly being tarnished. The idea that you will do better than your parents and that your children and grandchildren will do better than you can no longer be relied on.
"For banks that should mean employing more critical evaluations of creditworthiness and more reliance on credit history, and being warier of abuses of credit and of cyclical and structural elements in the uses of credit - especially credit cards," he said.
Mr. Braverman called it striking that over the past year the median weekly wage of U.S. workers fell from $479 to $475 in nominal terms.
"This does not happen except in a very deep recession, a depression, or a period of major structural adjustment in the economy," he said. "Clearly it is not something you would expect to see during an economic expansion."
Mr. Braverman feels high growth of consumer credit was among several special factors that propelled the economy's strong performance last year.
And he remains critical of the Federal Reserve for raising interest rates last year in reaction to what he saw as a transitory situation. He particularly takes issue with the Fed's repeated insistence that credit had to be tightened to thwart a resurgence of inflation.
"Even if the inflation rate actually picks up by a couple of notches, it certainly isn't going anywhere," Mr. Braverman said.
"There can be supply constraints, strikes, bad harvests, political turmoil, tax increases, and all of these can cause prices to rise," he said. "But that is still not inflation by its historic definition as an excess of demand, particularly fueled by borrowing," he said.
"That sort of inflation seems to stand little chance of developing," he asserted.
In fact, Mr. Braverman regards the trend of disinflation - falling inflation - as so powerful that it could eventually approach the point of outright deflation - falling prices.
"I am not saying we are going to have serious deflation, but I think there is about as much chance of that as serious inflation," he said. "And the Fed ought to at least be considering this."
As an example of the strong disinflation trend now under way, Mr. Braverman pointed out that Ford Motor Co. has said it will hold its cost of automobile production flat for the next five years.
The nation's inflation rate, as gauged by the consumer price index, is currently running at a 2.6% annual rate. That is down from 3.2% in May, which may have been the rate's peak for this business cycle.
Moreover, a special study group headed by Michael Boskin, a former chairman of the President's Council of Economic Advisers, recently told Congress the price index may be exaggerating inflation by as much as two percentage points.
"The Fed firmed with no inflation threat, and they now say it was because they firmed that we didn't have inflation," said Mr. Braverman.
"In fact they are taking credit for preventing something that wouldn't have happened anyway and thus avoiding blame for having done anything bad to the economy and the financial markets," he said.
"It seems clear why major inflationary problems are not on the horizon," the economist said. "If producers don't have the ability to raise prices because of global competition, they also have no ability to raise wages, which employees in any case have no ability to demand - for the same reason."
The situation would appear to augur modest or sluggish economic growth until some equilibrium is reached and opposing forces are brought into play.
"To me, it is inevitable that the economy has to give ground until incomes come up," he said. "If the incomes aren't there, and the job prospects aren't there, the expansion of credit cannot be sustained forever."
Mr. Braverman is not predicting a deep recession, but he said he expects the economy to have trouble maintaining much altitude. He sees the Federal Reserve lowering interest rates several times over the next year in a bid to sustain momentum.
If fact, with inflation receding, he sees significantly lower rates in the future than many Americans have ever experienced.
The median Treasury bond yield over last 200 years has been 4.25%, he pointed out. It typically exceeded that level only during what he defines as wartime, which would include the long Cold War period.
"In other, more settled times, the country had a much more moderate level of rates than we now seem to believe is possible," he said.
"And that leads me to believe that 4.25% as a long-term objective for rates is not as ridiculous as it may sound, particularly if we get better control of the federal deficit and have a more stable currency relationship globally."
Ultimately, low inflation and low rates should help the economy, but the economist cautions that postwar periods of the past have typically been characterized by serious economic retrenchment.
Right now Mr. Braverman puts little faith in economic indicators that show the economy building new momentum. With huge forces of change in play, the data do not reveal the underlying fragility of the economy, he says.
For example the Labor Department's household survey for its much-watched monthly employment report reflects many people with temporary jobs, a rising portion of the labor force. Meanwhile, numerous people who have exhausted their jobless benefits are not counted among the unemployed.
Prior to joining DKB Securities in 1989, Mr. Braverman was executive director and chief economist for Bank of New York Securities and its predecessors, Irving Bank Securities and Briggs Schaele, a primary dealer in U.S. Treasuries.
Between 1967 and 1983 he was chief financial adviser to Chase Manhattan Bank's treasury, municipal, and foreign exchange department. He was financial economist for the American Bankers Association from 1957 to 1967.
Mr. Braverman earned his doctorate at New York University. He also has a master's degree from Columbia University and a bachelor's degree from the City University of New York.