I would go further: Anyone who carries a significant amount of debt on their credit cards at ANY time should seriously get their finances in shape. But this just tells us why credit card rates are so high - the fact that people are carrying huge balances on credit cards is itself an indication that they are bad credit risks who are not capable of managing their money well. Thus the high rates.
Credit card companies have other costs as well. For example, chargebacks. Consumers have a habit of converting disputes with vendors into costs for credit card companies by disputing the charge when they can not get a refund. The credit card company then goes after the vendor for the money, but if the vendor disputes the chargeback you wind up sometimes in a situation where the credit card company eats it. In any event, the entire affair is very expensive in time and money for the credit card company. I have been a vendor handling credit card accounts, and the chargeback problem is real.
When credit card holders do not pay, the credit card companies turn their accounts over to collection agencies - which means they only get back a percentage of what they are owed. The collection agencies take a pretty large cut, and if the case goes to bankruptcy court, the total paid back is only a fraction of the original debt in the first place, if there is anything left at all after the secured creditors get theirs.
In addition, credit card companies get scammed, they eat a certain amount of the loss when cards are stolen, and they have high transaction costs. Their legal costs are high as well. All of this gets converted into interest rates and fees that get passed on to consumers and vendors.
Well, we’ve been seeing low consumer confidence and lowered spending. I don’t think it’d take much for a lot of people to decide the car can last another couple years, the TV is still okay, and so on.
The fact that there ARE car sales and TV sales shows that Chessic Sense is correct. Some people choose to buy these things, others don’t. On that continuum there are always people who are right on the margin - a tiny change will push them from one decision to the other.
House refinancing is a better example, though, because it has nothing to do with consumer confidence or buying new things for yourself. It’s all about the numbers. If interest rates go below a certain point, it becomes financially sensible to pay the penalty to refinance. When that point is reaching, many people will refinance. This puts more money directly in their pockets just as if the government had given them a tax cut or sent them a stimulus check. Or, they refinance, keep their payments the same, and get out from being underwater on their mortgages faster, which speeds up our economic recovery and hastens the day when underwater mortgages no longer impede worker mobility or threaten cascading declines in home prices and empty neighborhoods. That in turn helps to boost business and consumer confidence.
This logic isn’t wrong, per se, but I think the reality of the refinancing decision is more complicated. Fewer marginal borrowers will choose to refinance even at low interest rates when they face more challenging economic prospects. So I still think there is an effect, but it gets diluted when we need it most.
In addition to the numbers, people consider the opportunity costs of paying the fees and expenses associated with refinancing. I might refinance today at a cost of $2500 and a breakeven time of 10 months. But I also might lose my job and burn through my emergency fund and have to put that $2500 on my credit card at 25%. In isolation refinancing might be the right choice, but only if I am confident I am not going to need to cash soon. I suspect that a lot of marginal borrowers will face this trade-off. The more concerned about the future they are, the less likely they will exchange security now for a breakeven in a year or so. It is not as if rates have fallen 200bps overnight and the breakeven is short.
Yes, I agree with all that. There is friction which prevents perfect decision-making. There are other restrictions to home financing you don’t mention, such as people not understanding the value of refinancing, or the cost in time and effort to do so is too high when the gains are small and deferred long into the future. Another limiting factor is that people may choose not to refinance today, even if it would result in lower costs, if they believe that interest rates are still going down and it would be smarter to wait a little longer. Likewise, people will sometimes refinance at higher rates, if their perception is that interest rates will continue going up and it would be smart to pay a small long term increase in cost in exchange for avoiding a refinance when interest rates are even higher.
Nonetheless - mortgage refinancing is one mechanism by which the velocity of money goes up when interest rates go down. Durable goods purchases are another. People who have been putting up with a broken dishwasher or a car that’s killing them in maintenance costs may choose to pull the trigger and buy new when rates come down.
These things are all true but not the point. Whether times are good or bad, the number of people who don’t understand refinancing is probably about the same. We should care about friction in the refi decision that is endogenous to perceptions of current and future economic circumstances. I am not arguing that we should raise interest rates, just that I am skeptical that at this point, they are going to have a material effect all things being equal.
Again, I agree with you. I was just expanding on the notion that mortgage refinancing doesn’t always move smoothly with interest rates. I’m probably guilty of a bit of a segue there.