The Free Market

I had to laugh at a quote in a recent American Banker article. Here it is - with my emphasis on the last sentence:

"The Fed is relying on its own clients' view that these assets are now being underpriced in the market, and that is the root of the problem — that they are still good credits that are being underpriced. That line of reasoning undermines the Fed's belief in free markets, because investors obviously disagree, or they wouldn't be underpriced."

What is so funny is that the "quotee" seems to miss the very real thing that make markets work. If we live by the quote above then no one would ever buy in a down market. If the market for a particular asset is down, it "must" be underpriced and therefore not worth buying or investing in.

Time and time again, however, savvy investors see opportunity in underpriced assets and end up making a lot of money when others come to their senses and the value of the asset snaps back into line. Warren Buffet comes to mind here.

I don't see how the Fed's view that an asset used as collateral that is, for the moment, underpriced undermines their belief in a free market. If anything, it shows their strong belief in just the opposite.

Consumer Credit Poised to Grow?

By many accounts, consumer spending is slowing and we see parallel weakness in the %change in consumer credit. However, there is compelling (though anecdotal) evidence that we are poised to see a rebound in the growth of consumer credit. Here's why. Over the last few years, much of consumer spending has been fueled by the use of home equity lines of credit. In reviewing the trends, it has been awhile since we saw consistent double-digit growth month-to-month in consumer credit. Now that the equity tap has been turned off for many consumers, consumer credit vehicles may once again be the go-to credit source for Americans. If this happens, we will no doubt see a return to decent growth in non-equity credit lines.

In fact, institutions trading in securities backed by credit card receivables are feeling pretty good about the stability of the market.

What does this mean for credit unions? Opportunity. Many credit unions shelved or curtailed heavy marketing of traditional consumer credit products while in hot pursuit of equity business. Now may be the time to dust off portfolio growth strategies for consumer credit programs and grab some of that opportunity for ourselves.