The MacNeil/Lehrer Report; The Cost of Credit

ROBERT MacNEIL: Good evening. For months economists have been warning that the United States was on the brink of recession. Some say it hasn`t happened yet because consumers have been on a buying spree, and that has been made possible by a rapid increase in consumer borrowing. But economists are now wondering whether that surge of credit buying hasn`t reached its limit, which could in turn cause a slowdown in business and actually start the threatened recession. They`re also wondering whether the sheer size of consumer debt may not deepen a recession if one comes. There`s evidence in recent weeks that the consumer is beginning to hold back. Auto sales slumped sharply in late May, it was announced today. Last week the government`s index of economic indicators foreshadowing the future health of the economy showed the sharpest decline ever recorded, a drop of 3.3 percent. So tonight, worries about the credit boom and what happens if it goes bust. Jim?

JIM LEHRER: Robin, every fact and figure concerning our debts as individuals and as a society are absolutely staggering. No need to go through them all, a trillion this, a billion that, and so on; just a few make the point. Our total personal debt as Americans has increased fifty percent in the last five years. In the first quarter of this year it stood at a boggling $1.1 trillion. Sixty-one percent, or $760 billion of that, is tied up in home mortgages; another $278 billion, twenty-eight percent, in installment debt -- TV sets, washing machines and other items paid off on a weekly or monthly basis. It all gets much simpler when said this way: every man, woman and child in this country owes an average of $5,600, a figure that has doubled in the last nine years. For wage earners, twenty three cents out of a payroll dollar after taxes goes to pay debts, on average. And by the end of this year more than 600 million credit cards will be in circulation in this country; by 1985 it`ll be at 700 million.

In short, the figures say what we already know: there`s very little we can`t buy on credit these days, and as a result there`s very little we don`t. Robin?

MacNEIL: One measure of strain in consumer borrowing is when the percentage of delinquent borrowers goes up. Two percent is considered normal. Before the 1974 recession it passed three percent. By the be ginning of `79, it was at 2.7 percent. As delinquencies rise, so do the number of people seeking credit counseling. The National Foundation for Consumer Credit is a non-profit organization which runs 219 counseling groups across the country. Robert Gibson is the Foundation`s president, who is with us in Washington. Mr. Gibson, are more Americans now borrowing more than they can cope with?

ROBERT GIBSON: Well, actually I think that they are not. People are using credit, obviously, to a greater extent now than they have previously. Part of that is because they`re using it in some instances to supplement income, to try to maintain a standard of living to which they`ve become accustomed, one that they feel is desirable; and as a consequence, with the inflationary impact of utility rates and rising gasoline prices and rising grocery bills and these sorts of things, people are depending to some extent on the use of credit to maintain a standard of living that their income no longer will cover.

MacNEIL: Are more people seeking the kind of counseling that your organization offers because they`ve gotten into trouble with their installment debt?

GIBSON: Yes. This past Thanksgiving-to-Christmas period you had an unusual circumstance; we had people coming to us willing to surrender credit cards, willing to go into financial counseling and surrender that credit privilege. This is the first time in ten years that this sort of thing has happened, their willingness to give up a credit card just before Christmas buying and to seek financial counseling. We know that in our counseling service across the country there are backlogs of people who are seeking financial counseling now because they are concerned about their particular problems.

MacNEIL: What kind of people do these tend to be in terms of income?

GIBSON: Well, by and large they`re middle-income families, but we`re finding individuals and families from the upper income -- over $100,000 a year -- who are coming at this time and looking for help.

MacNEIL: How do you explain to yourself the great increase in consumer credit?

GIBSON: Well, I think that people today are feeling somewhat anxious about their use of credit. If I recall, a recent Lou Harris poll indicated that over fifty-two percent of American families today showed either extreme concern or much concern about their indebtedness. But another study that was done back about four years ago on the American family by the Daniel Yankelovich organization pointed out that people have an unusual perception of debt. Debt to most families is when they`re unable to pay bills.

If they`re able to meet their contractual obligations on a monthly basis, they don`t consider this debt, this is part of the cost of living.

MacNEIL: Are attitudes to being in debt changing?

GIBSON: Yes; yes, they are.

MacNEIL: How?

GIBSON: Absolutely, and you don`t really have to go into the Bible belt to find attitudes about debt that are changing. And we look to the federal government very often, and we know that there`s some benefit to indebtedness.

MacNEIL: Does all this concern you, as somebody who advises people on credit and who represents both borrowers and lenders of credit, I understand your organization does...

GIBSON: That`s correct.

MacNEIL: Are you concerned about the growth of it and the amount of it? Are you worried about it?

GIBSON: Well, I believe that a vast majority of American families still are able to handle contractual obligations which they undertake in good faith. But what is happening now, and in this area, the Washington, D.C., area, last winter, we found that in some homes the utility bills were higher than the monthly mortgage payment. Now, this poses a problem for families. Obviously they`re unprepared to make the kind of economic adjustments within their own lives with the kinds of shocks that are coming with rising utility bills, grocery bills and all of the things that are coming at once. And when gasoline in some parts of the country goes from sixty-six to ninety-nine cents a gallon in three months, this fifty percent increase crushes a number of families.

MacNEIL: I see. So it`s not, in your view, so much that people have borrowed that much more but that other cost increases in their budget have swollen what was left of their budget and made the borrowing look more risky. Is that a fair statement?

GIBSON: Well, that coupled with some misuse of credit. Obviously, credit was intended for people to be able to buy automobiles and appliances and major items of furniture, homes, things of that nature, but now we find people going into drugstores and buying lipstick and chewing gum and cigarettes and charging it on their card. This to me is an improper use of credit.

MacNEIL: Well, thank you. Jim?

LEHRER: Much of the money Americans owe, of course, is to their local or neighborhood bank. C.C. Hope, Jr., is president-elect of the American Bankers Association, the industry`s major trade organization. He is vice chairman of the board of the First Union National Bank in Charlotte, North Carolina, a commercial bank with 176 branches throughout the state of North Carolina. Mr. Hope, are you concerned about the growth of consumer debt?

C.C. HOPE, Jr.: I`m not concerned about the growth of consumer debt, because even though the figure that was stated earlier in this program, that consumer debt had increased over fifty percent during the past five years, if we look back through history, it also increased about sixty percent the five years prior to that. If we look back over the history of consumer debt in this nation, we`ll find that the American consumer has handled his obligations and has usually been ahead of the rest of the world in determining what he can handle in a reasonable and honest way.

LEHRER: So from your point of view, there`s nothing to worry about, the fact that it`s growing.

HOPE: I think it`s always a matter of concern when we find ourselves being told that we`re headed into a recession, that we must give greater recognition to the possibility of higher unemployment; but I`m certainly not concerned about the level of consumer debt in this nation today. It`s still only about eighteen or nineteen percent of disposable income, and the consumer, in the final analysis, is the one who determines whether he can make that monthly payment.

LEHRER: As a matter of policy, banks do encourage people to borrow more money, right?

HOPE: The marketing program of banks and other financial intermediaries across the country are set to encourage people to use their resources in, I think, a very equitable, fair way. I think that we`ve heard a lot about banks and others being criticized for putting too many pieces of plastic in the hands of the consumer...

LEHRER: Meaning credit cards.

HOPE: Credit cards. I don`t believe that`s true. I think that the consumer is the best judge, and I have a lot of confidence in the American consumer`s ability to handle credit in a reasonable and responsible way.

LEHRER: Some have also suggested, Mr. Hope, that this new mood of competition, very vigorous competition that`s hit your industry in the last few years, has also encouraged people to borrow more money. Is that so?

HOPE: I think that the competition has encouraged the competitors to get out and try to encourage people to borrow more money. I`m not sure that it is the competition in the finance arena that has encouraged the borrowing of money. We hear much today about consumers buying to get ahead of the inflationary forces; buy now, save for tomorrow. And I`m not sure that`s all bad. It`s bad from an inflationary standpoint, from the standpoint of the entire country, pushing up prices and causing inflation to soar; but in the final analysis our country is geared to encouraging purchases on credit, because we give credit on income tax statements for the interest that`s paid, products that are bought today are more tomorrow than they are today.

LEHRER: But what Mr. Gibson just said is that his opinion of the misuse of credit is people are now buying cigarettes, toothpaste -- I think you said lipstick, Mr. Gibson -- but toothpaste, things like that on credit. Do you consider that a misuse of credit?

HOPE: I`m not sure I consider that a misuse of credit. I think that it`s a function of the force of inflation that people are putting purchases of that type on credit where they previously didn`t, because their purchasing power day by day is less. I think also we have to look back at the credit history of this country. Many, many things are placed on credit cards, bank credit cards, today that previously were charged at grocery stores, at service stations, at drugstores. Now they`re being put on a piece of plastic, or a credit card issued by a bank. The credit was there previously, but it wasn`t calculated because it was through the retailer and not through a bank credit card.

LEHRER: Finally, let me ask you a question about a point you made earlier. Are the banks of this country now figuring in the possibility of a recession in terms of their loan policy? Is that impacting on their loan policy, the possibility there might be a recession around the corner?

HOPE: I`ve talked to many bankers across the country who are concerned about the possibility of a recession and therefore concerned about the ability of consumers to maintain their monthly payments in the event of high unemployment. I haven`t found any widespread belief that, first, we re headed towards that sort of a major crisis. I think that responsible individuals, both consumers and financial individuals, are taking a closer look at the method and manner in which credit is extended.

LEHRER: Mr. Hope, thank you. Robin?

MacNEIL: One economist worried about the high rate of delinquent borrowers is Dr. Albert Cox, president of Merrill Lynch Economics, the forecasting arm of the nation`s biggest brokerage house. Dr. Cox, how concerned are you about the amount of consumer debt, first of all?

ALBERT COX: Well, we`re concerned mainly with the fact that consumer debt, including mortgage and installment debt, has simply been rising in the past several years much faster than either consumer income or consumer assets; and the higher those ratios go -- in other words, the higher you get in debt relative to your income or your assets -- the more future constraint that`s going to place on consumer spending on the one hand and the greater potential trouble it poses when a downturn does come and when people start getting laid off. So it is of concern; we`re not alarmed about it, but we don`t like the ratios to be as high as they are in terms of the economic outlook.

MaCNEIL: We just heard Mr. Hope saying that consumer debt is still only at something under twenty percent of disposable income after taxes and that didn`t concern him very much.

COX: Well, it does us in terms of the near-term outlook, because it`s just about at an all-time high; as far as we can take back the figures, it just keeps getting higher and higher.

MacNEIL: Why should we be worried about it in terms of economic policy? What could it do to us?

COX: Well, if the downturn -- and by the way, we think a recession has probably started -- now, if it cumulates and starts to get rather deep and you do get rising unemployment and extended layoffs, let`s say particularly in those families who have two breadwinners right now, if one breadwinner is laid off and they have all of this debt that they have accumulated because there have been two breadwinners in the last four years, you`ve got potential consumer bankruptcies and problems. Now, we think it`ll be contained and not widespread, but the situation is more vulnerable in terms of the debt problem now than it was in the last recession, for instance.

MacNEIL: Just because there`s more debt there and there are more two-wage- earner families?

COX: Because there`s more debt in relation to income, and there`s more debt in relation to net worth.

MacNEIL: I see. Let`s separate the two things. First of all, are you concerned that the downturn of consumer spending could hasten the arrival of a recession?

COX: Well, the downturn in consumer spending will be part and parcel of the recession itself. In other words, consumer spending will be the thing that does it, and we think it started a couple of months ago.

MacNEIL: And it`s started now.

COX: We hope so, because we would hate to see a downturn in consumer spending start from even higher levels of consumer debt than they already have, because the higher your debt gets, the more leveraged you become; and leverage is nice on the up side, but it can become very unpleasant on the down side.

MacNEIL: In the range of recession that Merrill Lynch is considering likely, how many additional people are likely to become unemployed?

COX: Well, the unemployment rate in our favored forecast would go up at least one to one and a half percent.

MacNEIL: Which would be how many people?

COX: Let`s see...

MacNEIL: About a million people per percentage point?

COX: Something like that, a million, a million and a half people. And among those people the ones that we would be concerned about insofar as consumer debt is concerned, as I said, are those, let`s say the house wife who has gone to work in the past four years.-- there have been about three or four million of those, by the way, who have been employed in the last four years -- that housewife who has gone to work to support that debt and the family`s financial situation, who then gets laid off and then you have trouble with this high level of debt.

MacNEIL: Well, thank you. Jim?

LEHRER: Here in official Washington it`s the job of the Federal Reserve Board to monitor and influence the availability and cost of money to lend. Nancy Teeters is one of the board`s five governors. She`s been on the board since September; before that she was chief economist for the House Budget Committee. Governor, do you share Mr. Cox` fears about the rise in consumer debt?

Gov. NANCY TEETERS: We have monitored the rise in consumer debt very carefully. It actually reached a peak -- there are two types of consumer debt out there, one`s installment debt and the other is mortgage payment -- the installment debt reached its peak, it appears to be sometime last fall, and has been declining rather slowly. Now, I don`t mean in absolute terms, I mean in terms of repayments relative to after tax income. That reached a peak of close to a little over seventeen and a half percent; and the combined montage and installment debt also seemed to have reached a peak of the twenty-three percent that was mentioned earlier. It has begun to drop down also, so that we may have seen the actual continued rise in consumer debt maybe behind us. But we have been watching it very carefully.

LEHRER: After having watched it, has the reaction been one of concern, or this is no problem, or what?

TEETERS: I don`t think either of those are the right answer. I mean, we`ve been watching it to see how high it goes; we`ve been watching the rate of delinquency, non-payment of the debt, and we`re concerned about it but we don`t think that it`s to the point that it`s a major problem in the economy at the present time.

LEHRER: All right, let`s go to some of the other points that Mr. Cox made. First of all, he says the downturn has already started in the economy; he says it started a couple of months ago. Do you agree with that?

TEETERS: Well, I don`t think you can tell at the present time. One of the problems in interpreting the current economic data is that we`ve had a very jagged quarterly pattern ever since the recession of 1975. we don`t yet know whether this is just another off quarter or whether it`s the beginning of a major slowdown.

LEHRER: How do you-all at the Fed see the relationship between consumer debt and the economy generally but particularly a recession?

TEETERS: We see it primarily in terms of what it will do to consumer demand. If the consumer, who has been a very strong supporter of this recovery, if he feels...

LEHRER: You mean by buying a lot.

TEETERS: By buying, yes, has been our mainstay of recovery, the consumer probably feels that he may have enough debt, would like to pay down some of it, and that means that increased consumption is no longer a source of economic expansion. However, at the same time the consumer is beginning to slow down a little bit we`re finding that business investment, for example, is beginning to pick up. So that we`re having other sources of strength coming into the economy at the present time.

LEHRER: It does not bother you as it does Mr. Cox that consumer debt has been or is increasing at a rate faster than consumer income and assets are increasing? Is that something you-all sit around and worry about?

TEETERS: Well, actually what you`ve had is an increase in the repayment ratio to after-tax income which looks very much like...

LEHRER: When you say repayment ratio, you mean people -- explain what you mean by that, in terms I can understand.

TEETERS: Well, it`s the same that was used earlier. It`s what proportion...

LEHRER: I didn`t understand it then, so.... (Laughing.)

TEETERS: It`s what proportion of your take-home pay -- that is, after taxes -- are used to pay debts. And over the years since the end of the war...

LEHRER: The twenty-three percent.

TEETERS: The twenty-three percent. Over the years this has risen as people have become accustomed to using credit cards and installment debt as they`ve gone into mortgages; it does seem to respond to general economic conditions, at least in the last ten years. So that it will rise as the economy recovers, and then people take the period during a recession to pay it down; so that the repayments as a percent of take home pay declines during periods of recession.

LEHRER: Governor, thank you. Robin?

MacNEIL: Yes; Mr. Gibson, you`ve been listening to both our Merrill Lynch economist and also Governor Teeters. At what point in consumer borrowing would you begin to get worried that it was too much? What would ring the alarm bell for you?

GIBSON: Well, let me answer that obliquely. First of all, I agree

with Governor Teeters; people do want to pay down their indebtedness. They`re making every effort to get out from under what they consider to be an anxious load of consumer debt; they want to pay their bills and get them out of the way. But a point I made earlier...

MacNEIL: You mean people are trying to reduce the amount that they owe.

GIBSON: That`s right. They`d like to do that, but they`re being caught now in a constantly spiraling cost-of-living dilemma that precludes their ability actually to go ahead and reduce those payments as much as they would like.

MacNEIL: So could I come back to my question: is there a statistic you in the sort of consumer view of borrowing would have in mind where you`d begin to get worried about it?

GIBSON: Well, we`re concerned at the time that twenty percent of take-home pay is used for indebtedness of a non-mortgage nature.

MacNEIL: I see. And Mr. Hope, do you also notice this phenomenon of people trying to draw down their debts? Are you aware of that?

HOPE: Yes; Yes.... What is your question?

MacNEIL: Well, I was just wondering if you agreed with Mr. Gibson that in the consumer`s mind at the moment there`s a desire to reduce the amount of debt on his back.

HOPE:I think there`s no question that the consumer has slowed up in his incursion of debt. I think the consumer, perhaps, in reading about the possibility of recession and knowing his own problems with respect to inflation and how it affects his pocketbook, has decided himself -- and it goes back to what I said earlier, and that is that I believe that the consumer of this country is very responsible in his handling of credit. And I have great confidence in the consumers being able to determine how much they can handle on a monthly payment basis. I think one thing we lose sight of in this nation is that we talk about pieces of plastic, or credit cards, being handed to customers, customers now being able through automated means to receive credit when previously they went into banks and sat down and looked at a loan officer in the face and received an approval of credit. However, one of the things that we lose sight of is that these same people that are receiving credit on an automated basis today first have that credit line approved by their banks or by their financial intermediaries on the basis of sound credit judgment, and then they draw down that credit line. And I have great confidence that they`re handling that responsibly, and I think the facts bear that out.

MacNEIL: Well, would you agree with what seems to be the implication in Washington, that consumers solve this for themselves, they all get to a point where they say, "Hey, it`s a bit too much and let`s cut back a little bit," and it sorts itself out?

COX: Well, I agree with Nancy, I think it`s probably started. Hopefully it has, but the potential problem is that this correction of consumer credit is starting from debt ratios which are just about as high as they have ever been or higher. So we still have a potential problem on the down side. I don`t blame consumers for accumulating the debt that they have been accumulating...

MacNEIL: The problem on the down side being the one you mentioned earlier, that a certain amount of unemployment or layoffs might make difficulties.

COX: That`s right.

MacNEIL: I see. Well, thank you. Jim?

LEHRER: Should the government institute any kind of controls to slow down this growth in borrowing, Governor? Or to be more specific, is the Federal Reserve considering any kind of steps?

TEETERS: No, we`re not. The financial markets are so fluid that when you try to control one part of them they usually find another way to obtain credit, so we`re not considering credit controls at all at the present time.

LEHRER: Mr. Gibson, do you think the Fed should be doing something?

GIBSON: No, I agree. They`re monitoring activities, and their awareness, I think, at this time, is the appropriate action.

LEHRER: Mr. Hope?

HOPE: Absolutely not. How would you like to go into a bank and the loan officer say, "I`m sorry, but we`re out of money for automobile loans this week because we used up the allotment that the Federal Reserve says is the fair allotment for automobile loans for this country"? I say let the consumer decide the allocation of credit, not the federal government.

LEHRER: Even if there was a recession, even if there were a serious economic problem?

HOPE: I say do not let the federal government decide the allocation of, credit in this nation. The allocation of credit ought to be handled in the responsible manner which consumers have proved over a period of not the last five years or ten years but back into the early `20s when installment credit first gained its foothold in this country. The history of installment credit has been a very remarkable one in the way in which the consumers of this country have handled their obligations.

LEHRER: Governor, do you agree with Mr. Hope that the federal government should never get involved in this area, or only just not right now?

TEETERS: Well, we did have consumer credit controls during World War II, again in 1948-49, and during the Korean War. It seems to me that if we suddenly fall into a war like we did in the Korean situation, that you may want to use them temporarily to reorient the economy toward one of war. However, outside of that, I really see very little reason for using credit controls, consumer credit controls.

LEHRER: Mr. Cox, let`s ask you, you`re the only one who`s really said that you see a real problem here. Do you think it`s the kind of problem that the federal government should do something like instituting credit controls?

COX: Absolutely not. I think if the government got into it may be as big of a problem as the energy problem, so I would be dead set against government involvement in the allocation or the amount of consumer credit, and fortunately, as I say, probably the peak of expansion in this cycle with consumer credit has been passed, so ...

LEHRER: Yeah, but let`s say you`re wrong, Mr. Cox. Let`s say it hasn`t passed and let`s say a problem develops like the kind that you said might happen. Then what happens?

COX: Then the solution to it is not for the government to control credit, it`s for the government to do what it should be doing to get inflation under control so the consumers won`t be running out and buying things to beat the next price increase which has been created by the government.

(Laughter.)

LEHRER: I see. Well, we`re just going to stick to one subject at a time here tonight. Mr. Gibson, let me ask you: your job is to counsel people.

GIBSON: Right.

LEHRER: You`ve got my mother and a few other million watching tonight. What is your advice to the consumer tonight, to continue to borrow as a hedge on inflation, or what? Where we sit tonight in the state of the economy, what`s the best advice?

GIBSON: Well, obviously, we would propose that every individual and family do a financial asset study right now in terms of their current income and in terms of their outgo`s, their indebtedness, knowing well that we`re not going to lick inflation in ninety days or 120 days, and maybe not for several years; that the price of everything is going up, and not making any credit commitments that they can`t feel very comfortable in undertaking, knowing that they`ll be able to meet those obligations.

LEHRER: And they can go see Mr. Hope in North Carolina and borrow the money and everything`s fine.

GIBSON: And he`ll trust them.

LEHRER: Right. Okay. Robin?

MacNEIL: Thanks, Mr. Gibson, Mr. Hope and Governor Teeters; and thanks, Dr. Cox. That`s all for tonight. We`ll be back tomorrow night. I`m Robert MacNeil. Good night.