Transcripts

"Two Ways to Play" -Kevin Depew of Minyanville

SUSIE GHARIB: Consumers are paying off their debts and spending less money. Meanwhile, credit remains tight as banks are lending less. Tonight's "Two Ways to Play" asks the question: do these conditions point to an economic recovery? Here's Kevin Depew of Minyanville and Minyanville's Kevin Depew with some answers.

KEVIN DEPEW, EXECUTIVE EDITOR, MINYANVILLE.COM: I'd love to be optimistic about the prospects for an ongoing economic recovery, but reality is telling a different story. This week the Federal Reserve released data showing total consumer credit outstanding, which includes everything from credit card debt to loans for appliances, fell $12 billion in August and has now declined for seven consecutive months, the longest stretch since 1991. Why? Two reasons: one, banks are tightening lending standards and afraid to make new loans and two: consumers are hesitant to make new purchases. Like it or not, the U.S. economy is a consumer economy and consumption is dependent on credit. Without it, this so-called recovery is dead on arrival. What's really happening is that companies have been exchanging bank credit for bond market borrowings. Meanwhile, banks are borrowing at ultra low rates, which the Fed says will remain low and rather than lending, they're investing in higher-yielding Treasuries. This is called a carry trade and it's normal for this stage of a bull market. Essentially, the Fed is going to hold rates too low so banks can make back some of the money they lost during the credit crisis, which is what caused the Fed to lower rates in the first place. Eventually, consumer borrowing will pick up and then the entire cycle will repeat, from boom to bust.