At 70% of the economy, consumer spending will have to pick up for a broad recovery. Of course, the consumer has been laid low by job losses and mortgage foreclosures. Another dilemma is trying to stimulate spending and credit while, at the same time, reining in some of the excesses and abuses that contributed to the financial crisis in the first place.

The Federal Reserve’s new credit card rules to protect consumers went into effect on February 22 and are considered by many to be the most sweeping reforms in credit card history. The major changes include:

• No interest rate increases for the first year.
• Increased rates apply only to new charges, with existing balances still at the old rate.
• For cards with multiple interest rates, payments must be applied to the highest interest balances first. (This is the opposite of most multi-rate cards now; applying payments to the lowest interest rate increases the interest accrual on the higher rate balances.)
• Those under age 21 will have to either demonstrate an ability to make payments or have a cosigner to open a credit card account.
• Elimination of automatic “over-limit fees”, which apply to transactions over the credit limit, unless the borrower specifically “opts in” and tells the credit card company to allow those transactions. (The Federal Reserve is applying a similar restriction when people withdraw more than their account balance at an ATM or through a debit card; these non-credit card over-limit fees generated an estimated $20 billion in 2009 according to Michael Moebs, an economic advisor to banks.)
• Information on how long it will take to pay off the balance, including a comparison of making the minimum payment and the payment required to pay off the balance in three years and the interest savings between the two.

Banks, of course, can’t be expected to simply sit idle and accept these changes; law firm Morrison & Foerster estimates these changes will cost banks $12 billion a year in lost revenue, after writing off $35 billion in 2009 for credit card defaults. As a result, banks are resurrecting annual credit card fees, instituting new fees (e.g., inactivity fees and fees for services like issuing paper instead of electronic statements), increasing fees on overseas transactions and replacing fixed rates with variable rates, which are low now but could increase as overall interest rates increase. Banks are using a variety of tactics, from emphasizing convenience to exploiting fear, to persuade borrowers to choose to “opt in” to the lucrative over-limit coverage. (According to the Associated Press, one credit union is trying to differentiate itself, claiming on its website that although “some financial institutions may aggressively market the idea of a consumer ‘opt in’ . . . we have no such plans”.)

Until 2009, there had not been one single month in the last 40 years in which revolving credit outstanding (credit repeatedly available up to a specified amount and used at the borrower’s discretion as regular payments are made) was less than the prior year, and from 1990 to 2008 revolving credit grew by a steady 8% per year. The percentage of homeowners’ disposable income needed to service consumer (non-mortgage ) debt increased 44% from the early 1990’s to its peak in 2004.

While creative marketing will lessen the impact of the regulations on banks, the recession has already taken its toll on revolving credit. In December 2009, outstanding revolving credit was down over 10% from the prior year. In the fourth quarter of 2009, the decline in revolving credit accelerated, decreasing at an annual rate of 13%, while nonrevolving credit was unchanged. As homeowners continue to “deleverage” by reducing debt, they have reduced the percentage of disposable income going to consumer debt by 14% from the peak.

Those changes are consistent with overall consumer confidence. The Conference Board, which publishes independent economic information and forecasts, surveys 5,000 representative US households for its monthly assessment of consumer confidence. Overall consumer confidence had plummeted from over 70 to a low of 25 in January, 2009, only to quickly recover in the next four months to over 50. All aspects of consumer confidence took a big hit in February, 2010, with the overall confidence level falling 10 points from January. Concerns about the job market pushed the Present Situation Index of current conditions to its lowest level in 27 years, while the Expectations Index plummeted due to fewer consumers anticipating an improvement in business conditions or their income prospects over the next six months. The Conference Board notes that “this combination of earnings and job anxieties is likely to continue to curb spending”.

Regulations are critical to protecting the unsuspecting or the ill-informed, and to some extent can ensure a degree of fairness. Ultimately, though, the fundamental principles of risk and self-interest will drive the behavior of all market participants.