New Lending Risks Consumer Attitudes. (Management Strategies)

By Hanley, Claude A., Jr.; Furash, Edward E. | The RMA Journal, February 2003 | Go to article overview

New Lending Risks Consumer Attitudes. (Management Strategies)

Hanley, Claude A., Jr., Furash, Edward E., The RMA Journal

How--if at all--will the current bear market alter consumer financial behavior? Consumer expectations are the economic watchwords this year.

Heaven knows, there is no shortage of dark clouds on the horizon, given all the unwelcome developments of the past two years. Lately, the consumer is one of the more threatening clouds. But do we really need to pull out the industrial-strength umbrellas?

Consumers now use all the financial tools available to them--borrowing, making and redeeming investments, using paycheck income, and dipping into savings--to acquire and sustain their desired lifestyle. They are extremely reluctant to cut back and do not do so until their financial expectations become truly gloomy. Few lenders recognize or measure the impact of falling consumer expectations. Yet it is an increasingly important part of controlling consumer lending portfolio risk.

Lasting Effects

The severity of the decline in equity values certainly has the potential to leave scars on the consumer. The Dow Jones Industrial Average has declined approximately 38% from its peak in January 2000. The other major indexes have suffered similar or worse fates. Stock market losses now total in the trillions of dollars, including an estimated $678 billion of retirement assets. The standing joke is that 401(k)s have become 201(k)s. More than a few investors are too afraid or too depressed to open their monthly brokerage statements. They now perceive stock market rallies as a precursor to quick sell-offs rather than signs that the trough has been reached.

Because the last decline to resemble the current environment was in 1973 and 1974, investors under the age of 50 have not experienced firsthand the bottomless anxiety that a prolonged bear market can produce. Meanwhile, the percentage of households with direct exposure to the equity markets has more than doubled since that time. And whereas the economy continued to grow following the sharp, but brief, 1987 stock market crash, today's recovery is hampered by significant international turmoil and economic recession, as was the case in 1973-74.

Household Spending and Saving

It's natural to assume that such a precipitous decline in stock values will spur households to save more and spend less. However, based on experience and economic theory, it is doubtful that this bear market will reverse the decline in the personal saving rate that has occurred over the past three decades. Irrational as it may seem, consumers tend to keep up their spending levels until adversity is overwhelming. Besides, it is the wealthy who account for most savings and investments, while the majority of consumers live from paycheck to paycheck.

The wealth effect theory holds that household spending levels depend on whether wealth is rising or falling. Steep losses in investment portfolios should lead to an increase in household savings. Yet consumer spending grew during this current bear market as well as in 1987. While the personal saving rate did increase in 1973 and 1986, the increases were ephemeral. In subsequent years, the personal saving rates sank below the rate that prevailed prior to the onset of the bear market.

The explanation for this seemingly contrary behavior springs in part from the psychology of expectations. In addition to changes in wealth, household spending is strongly correlated to expected earnings. Despite declines in the stock market, household income has increased in real terms, unemployment remains reasonably low, and tax rates have declined. Consumer spending shrank in 1974 because households were pessimistic about expected income. The unemployment rate was much higher and the economic outlook bleaker than today's.

Another part of the explanation for sustained spending in the face of declining stock values lies in the appropriate measure of household wealth. The personal saving rate omits changes in home equity--the primary source of wealth accumulation for most households. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)


1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited article

New Lending Risks Consumer Attitudes. (Management Strategies)


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.