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Tilting at Windmills

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October 21, 2008
By: Hilzoy

More Trouble Ahead

From the Washington Post:

"Consumers are increasingly unable to pay off their credit cards, forcing banks to hoard cash to protect against future losses and lend to fewer people, according to reports yesterday from several of the nation's largest banks.

These financial disclosures showed a spike in credit card loans going bad, putting further pressure on already-stressed balance sheets. J.P. Morgan Chase said the number of credit card loans in default rose 45 percent in the third quarter from the comparable period a year ago and predicted that default rates would sharply accelerate through 2009, with 7 percent of credit card loans going bad. (...)

The deterioration in consumer credit, the latest downturn to whack Americans after the housing slump and mortgage meltdown, threatens one of the linchpins of the U.S. economy. Over the past 10 years, credit card debt has gone up 75 percent as Americans' real wages and savings rate have stayed flat. That means Americans have been spending beyond their means -- and fueling economic growth with borrowed money.

Now, the housing crash, financial downturn and contracting economy have made it more difficult for Americans to settle their bills, setting off a downward spiral. As people fail to pay off their credit card bills and other loans, banks must put away money to cover expected losses. So banks lend less. Americans who tended to rely on loans to fuel their spending must cut back, readjusting their spending habits to conform with what they earn.

"Given that the savings rate has been minuscule, there's no reserves in the tank for the consumer to tap his savings to support his spending," said Scott Valentin, a financial services analyst at Arlington investment bank Friedman Billings Ramsey. But consumers have been driving about two-thirds of the U.S. economy.

Overall, the rate of credit card loans going bad increased 54 percent in the second quarter of 2008 from the same period in 2007, according to Federal Reserve data, the latest available.

A report this week from Innovest, a research firm, said banks and other credit card lenders could record nearly $100 billion in losses because of bad loans through the end of next year. Innovest said financial firms could be reaching a "tipping point" at which years of growth in credit card debt starts to decline."

There are several problems here. The first is the possibility that banks will have to write off even more bad debt. Americans owe about $950 billion worth of credit card debt, and, as with mortgages, credit card debt has been securitized. The second is that banks might hoard cash if they think they will have to write down bad debts, at a time when credit is already very tight. But the third is that, as the Post notes, consumer spending drives a lot of our economy. But there's a problem:


Wages have been flat for the better part of a decade. We made up for that fact by borrowing, both against our houses and on credit cards. Since virtually every form of credit seems to have dried up, and a large jump in people's wages doesn't seem to be in the offing, it's hard to see how consumer spending will not take a very serious hit. And if it does, the economy will suffer enormously.

Hilzoy 9:29 PM Permalink | Trackbacks | Comments (23)

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Looking at that graph, one can't help but give thanks to Dear Leader for asking us to go out shopping after 9-11. That was some quality leadership there.

Posted by: ed on October 21, 2008 at 10:56 PM | PERMALINK

I'm hearing from different sources that consumer spending is taking a huge hit. Orders down by half.

Posted by: jayackroyd on October 21, 2008 at 11:02 PM | PERMALINK

An economy built on a government that aggressively cuts its revenues and deficit spends during an economic expansion, a working class and a middle class borrowing to finance consumption, all while the investor class gets all GDP gains funneled up to them is going to collapse, and collapse spectacularly.

Eventually you'll end up with a situation where the investor class has run out of smart investments to make (and the glut of capital has made returns on smart investments universally lousy), so they end up doing insane things like making long-term bets with each other on whether or not the middle class will be able to pay off the debts on incredibly inflated assets (woo hoo capital glut!) that they've been using to finance consumption.

This is stupidity. Unions need to be strengthened, the middle class needs a raise, Wall Street needs a SEVERE haircut, and the government needs to raise taxes to vaguely approximate expenditures (not now, but later).


Posted by: anonymiss on October 21, 2008 at 11:12 PM | PERMALINK

Christmas sales expected to be down about 15%.

Posted by: lampwick on October 21, 2008 at 11:13 PM | PERMALINK

I'm not sure why this article expects us to feel sorry for the poor credit card lenders - it's not as if they haven't been able to make their money back in exhorbitant interest rates. The fact that the consumer is still stuck with unpaid principle can't mask the fact that in most cases, they've more than paid back the original amount of credit extended. It's just been made that much more difficult to reach paid-in-full status with credit card interest rates routingely topping 19% (and much higher).

With laws passed in their favor and at the expense of consumers/workers such that a single late payment on any isolated account allows all other creditors to raise their interest rates nearly without restraint, well, it's hard to feel anything but schadenfreude for the banks.

Posted by: KG on October 21, 2008 at 11:55 PM | PERMALINK

A post with a graph! You truly are the blog-heiress (kinda) of Kevin Drum!!

Posted by: jcricket on October 21, 2008 at 11:59 PM | PERMALINK

Oh, bah!

Hysterical-zoy, you've got it all wrong. Wages are flat because taxes are too high.

What would stimulate the American economy is a good old-fashioned, across the board, tax cut of about nine or ten percent. Wages would shoot up, and people would pay off their debts AND spend a little coin here and there. Christmas would be SAVED and liberalism would take a swift kick to the nuts ONCE AGAIN.

Really, there isn't any problem in America that cannot be solved by getting the government out of the way of capitalism. Don't think for a minute that this minor blip--the so-called "credit crunch" means nary a whit. It doesn't. It is an investor strategy designed to force tax cuts out of the government. Speaker Pelosi and her ilk are wealth confiscators, and nothing short of creating a run on banks will loosen her bony fingers from the throats of good Americans.

Cut taxes (and I shall be populist and say that if you don't want to cut taxes on those of us who make more than $250K per year, all well and good) and let the little guy have more money in his grubby little hands. He can go and buy some more beef jerky and that extra-large bottle of the soda or whatever and stimulate this economy BACK into a run rather than a walk.

Posted by: Norman Rogers on October 22, 2008 at 12:00 AM | PERMALINK

Absolutely, KG!!! The CC division of any bank is a huge profit center. No tears here for the banks.

But, all those brick and mortar retailers are gonna have to re-budget for the coming year, and into 2010. It shouldn't surprise anyone when we hear that they start falling like dominoes. Look for the remaining outlets to be in population clusters outside of high-rent cosmopolitan areas. Sales jobs will probably be volatile.

Posted by: jcricket on October 22, 2008 at 12:05 AM | PERMALINK

Almost all the "help people stay in their homes" remedies are complicated and prone to resentments and corruption.

But, credit card debt has a simple populist remedy: usury ceilings on interest.

Posted by: Bruce Wilder on October 22, 2008 at 12:15 AM | PERMALINK

Cut taxes (and I shall be populist and say that if you don't want to cut taxes on those of us who make more than $250K per year, all well and good) and let the little guy have more money in his grubby little hands. He can go and buy some more beef jerky and that extra-large bottle of the soda or whatever and stimulate this economy BACK into a run rather than a walk.

Since when did Normie start shilling for the Obama campaign? Cut taxes on middle and lower-income workers, have the 250k+ crowd pay their fair share? I'm in!

Posted by: jonas on October 22, 2008 at 12:24 AM | PERMALINK

Norman Rogers,

I'm shocked. Your proposal clearly cuts against basic principle, at the very moment that complete policy success is within grasp.

Taxation, n. The forcible extraction of money by government from citizens who have shirked their civic duty to establish congressional lobbies. The ideal level of taxation is that under which the entire population becomes independently wealthy, resulting in zero employment.
Posted by: Jassalasca Jape on October 22, 2008 at 1:13 AM | PERMALINK

The down turn in those banking stocks and investment firms that are taking a hit right now in the market are exactly for this credit card business. Coupled with the fact that many card holders are of the disaster types, hurricanes, tornadoes, fire, flooding, etc, here they have homes and personal property wiped out is sending the credit cards to their limits. Worse may not make those payments.

With this said and an election that is likely to change the government employees by the millions across American, government agencies will change, is also likely to happen. The Government is and has always been the largest subcontractor in the world. Bush and Company have turned the Government into a partisan business machine from Domestic and International needs that will likely turn into an avalanche down turn for the economy. This being the real problem that Mainstream Media knows but will not talk about.

Just as anyone with good sense that has studied calculus knows that as your limits move to zero, such as tax revenues, that range and domain will shrink so much the pool of money to do basic social services are jeopardized or disappear. This is obviously already happening when deficit spending is in full swing supported by the Republican Party that is in denial for a huge, huge mistake in planning and government leadership in this area. Worse is the real crippler connected to the Federal Reserve Board, all bail out money will be funneled away from the electorate rather than to the electorate as it always has been for about a century that included a huge foreign influence.

As this Federal Reserve money dries up so do friendly loans that used to rely on this fat cat free money from the American tax dollar. The age of free money from the tax dollar is over and that will drive the stock market further to a six thousand or seven thousand level plus the change of portfolio’s that will change to Universal heath Care.

An incredible change, that in a huge the way corporations will actually have more money to do business, whole Heath departments eliminated that are not needed. Heath care that opens up to independent agencies in the free market will absorb this balance. Unfortunately a huge shift in stock market strategy will likely be needed where the old MBA is extinct. Or MBA’s will not be needed to be replaced by computer auto intelligent systems that can remove political bias and partisanship.

The topper is the eventual elimination of the Federal Reserve Board, the Jekyll Island banking system. Chances are an open public investigation and public transparency done by Obama will eventually lead to the elimination of this agency and bring back this money management ability back to the Congress where it belongs according to the Constitution. This will be devastating to the fat cats that for almost a century have bilked tax money from the poor and middle class.

Posted by: Megalomania on October 22, 2008 at 1:17 AM | PERMALINK

Just as insane Republican (conservative) feed-the-wealthy, starve-the-poor policies in the 1920s, coupled with get-rich-quick-schemes, led to the Great Depression, similarly insane Republican (conservative) feed-the-wealthy, starve-the-poor policies over the past decade (actually longer), also coupled with get-rich-quick-schemes, has led to the financial crisis of today.

I'd say that we're less than 10 percent into the severe economic downturn our nation faces.

And whatever malady has afflicted the Republicans in the White House has bled over to the Democratic Party leadership in Congress.

Remember how anxious the White House Republicans, and Treasury Secretary Paulson, were to have Congress pass a Wall Street bail-out bill totaling $750 Billion? Even as these same Republicans delayed doing anything about this looming economic crisis for a long, long time, until finally they demanded this $750 Billion Bail-out Band-aid, rush, rush?

Well, the Democratic Leadership (Reid, Pelosi, Hoyer) decided to not push for an economic stimulus package meant to address the economic crisis from the bottom-up instead of the top-down at the same time that the Wall Street bail-out bill was passed, opting instead to delay consideration of any economic stimulus package until after the November election (similar to the delay by Republicans in the White House prior to the "emergency" Wall Street bail-out bill), thus letting the financial crisis get worse and worse instead of taking remedial action immediately.

The Democratic leadership in Congress needs to call an emergency session of Congress RIGHT NOW, because if they wait until after November 4th, odds are that lame-duck Bush will veto any stimulus package that doesn't include massive Republican tax cuts for the top 10 percent of wealthiest U.S. citizens.

If the Democratic "Blue Dog" leadership in Congress (once again) caves to Bush and the Republicans, and compromises, allowing these tax cuts into the bill, then middle-class taxpayers and our nation's poor will discover what sinking into another Great Depression feels like, for I'm certain "trickle down economics" is not going to slow our country's economic collapse at this point.

No matter what, waiting until late January, early February of next year will be far too late. Congressional action is required RIGHT NOW. But I'm not holding my breath.

Posted by: The Oracle on October 22, 2008 at 2:33 AM | PERMALINK

First, the lenders got greedy by offering credit to those who could barely pay, believing that a missed payment or two would generate higher returns through increased interest rates and late penalties.

Next, the lenders sought a coersion of that fantasy profit by spending billions in lobbying costs to force predatory bankruptcy laws through the Federal system.

Then, the lenders---unable to generate their dream-profit by putting the consumer out on the limb, and unable to garner their rapacious theft by putting the government out on the limb, went out on the limb of their own volition by creating variable interest with built-in upticks, regardless of whether the consumer paid on time or not.

Finally, in a band-aid attempt to curb the hemorrhage of illicit profit, the lenders curtailed credit by unilaterally reducing everyone's credit limit, believing they could save themselves by not having that currently-non-existent debt on their books.

As it stands today---and as it has stood for several months now---the lending institutions of the United States have not only destroyed themselves; they have likewise become a burden of suicidal proportions upon the global economy. There now remains but two leaves to fall from the limb, being (1) that the American market, no longer able to fuel itself via the paper tiger of fast-n-loose credit, returns to a cash-driven, pay-as-you-go economy, and (2) the oil-producers come to the final realization that the depression of their subterranean wealth is directly tied to the USD, and collectively float the valuation of global crude prices to another currency---quite likely, the Ruble. The first---already under way---will eventually lead us into a wholesale retrenchment of disastrous proportions by cleaning out approximately one-fourth to one-third of the current commercial marketplace, including retail outlets, industrial capacity, banks, and local infrastructure. The latter, on its own, would demolish the fraud that is the American economy, and return the United States to a depressed third-world status that matches the value of its standing on the world stage.

But---a combination of the two would bring with it the unthinkable nightmare-scenario where the world's concerns surrounding the possibility of Osama bin Laden getting his hands on a Pakistani nuke or two is of little consequence, when compared to the United States becoming just as ideologically and nationalistically desperate as the Taliban, while holding in its possession enough thermonuclear potential to incinerate the planet several times over.

If anything, this should speak volumes as to why the insanity that is the GOP must not be given the reins of power....

Posted by: Steve W. on October 22, 2008 at 5:55 AM | PERMALINK

You can tack on to this the reduced spending by state governments which are running large deficits . Spending by state and local governments adds a significant share of the overall economy. Much of this spending goes to vendors and contractors who supply goods and services. Many of these companies rely heavily on government expenditures and in turn pay state sales and income taxes. And so on it goes, spiraling downward in negative feedback loops.

Posted by: lou on October 22, 2008 at 7:10 AM | PERMALINK

This is a huge problem we're just beginning to wake up to. The credit crisis has spread from mortgages to all forms of debt. And with the consumers feeling increasingly pinched, defaults are going to become a way of life for the next few years to come.

Posted by: William on October 22, 2008 at 8:35 AM | PERMALINK

Does the increase in credit card debt come from the fact that, due to dubious securitization practices, banks were able to sell credit cards to bad risks, then securitize and sellf off these bad risks? This is what happened in mortgages, and if this is the reason, then we're really in trouble.

Posted by: Peter S on October 22, 2008 at 10:22 AM | PERMALINK

Where did this BS graph come from?

Why does it start at 1999?

Wages rose slightly through 1999 stayed flat through 2000 and went DOWN when President Chimpy took over in 2001. Inflation and depressed wages produce debt in the absence of belt tightening.
The call to shop our way out of the 2000 dot com bust did minor damage. The real heavy losses appeared to show up with teh "recovery of 2003 at teh start of teh Iraq war. Why?

What is it about war that makes Americans borrow money?

2003 was a time of stock market recovery. Was this consumer confidence? The delusion that heightened stock prices (as opposed to value) mean good jobs lie ahead?

The wages line tell us that ain't so. Stock prices can rise because industry is enjoying higher rates of return because they can gain revenue but payroll doesn't increase.

Lesson to America? Base your spending on what you make, not what Wall Street suggests you might make later. They have incentive to tell you how great you'll be doing "right around the corner".

Posted by: toowearyforoutrage on October 22, 2008 at 10:26 AM | PERMALINK

OK. Let me think out loud for a minute or two ...

I'm in an economy that largely depends on consumer spending for continued expansion. My profits derive largely from the expenditures of disposable cash from the vast middle classes.

Now, for some reason, I did three things: (1) I held down the wages of those middle class wage earners so they had to increase their borrowing to maintain a middle class living standard; (2) I offered them credit terms that virtually guaranteed that a certain percentage of them would ultimately be forced into default; and then (3) I securitized those debts, and based my corporate future on the potential returns.

OK. I get it. Good planning guys! Suddenly it's clear that Bush's MBA isn't an anomaly after all! You're all (gulp) just like him!

Posted by: Jack Lindahl on October 22, 2008 at 10:36 AM | PERMALINK

Consumer spending is going to drop even more than the raw default figures would indicate, because every card that goes into late-payment status means roughly a tripling of the interest rate. If you were carrying a $2K balance and paying $200 a month in finance charges, now you'll be paying $600 a month in finance charges, and the other $400 has to come out of food, gas, clothing and so forth. Which clobbers all the retailers in your area. (And of course forget about bankruptcy, because the new law says that would be evading your responsibilities.)

Posted by: paul on October 22, 2008 at 10:38 AM | PERMALINK

Ok, gotta jump in here on lou. This is not a negative feedback loop. Negative feedback is good and a design goal for lots of devices - any attempt to perturb the state of the device is resisted. (Hence the term negative feedback.)

This is positive feedback. Perturbations in the state of the economy are being amplified. Positive feedback destroys things.

Posted by: Butch on October 22, 2008 at 10:50 AM | PERMALINK

One of the historical parallels of this time and the Great Depression that's little-discussed is the role of technological transformation. Part of the driving force of the Great Depression was the accumulated economic dislocation due to the transformation from an agrarian to an industrial economy. In the last 30 years we have been undergoing an equally vast transition, from an industrial society to an automation/information economy, only this time the pace of change is about twice as fast, the whole world is involved, and there are vastly more mouths to feed.

Part of the reason banking turned to exotic and risky products was that all other products became highly commoditized and automated, moved closer to an essentially non-physical service like email, and thus became subject to ferocious competition and dwindling margins. Rather than becoming commodity sellers, the banks tried all sorts of creative means to sell higher margin products, which invariably resulted in selling higher-risk products. This kind of margin shakeout is likely to happen in many more industries, and nobody seems to have good ideas on how to address it.

So how do we really deal with the economic dislocation that's driving all this? Back in the Clinton years, there was discussion of how to get displaced workers educated and re-trained, but now that's been reduced to campaign platitudes and ineffectual school testing battles. Will it really work for Obama to repeat what FDR did and make a massive infrastructure investment to stimulate permanent new jobs? What other choices do we have? And when do we start talking about the really vexing and unpopular questions like population control and economic growth in a population-declining society?

I'd love to hear what our gracious hosts have to say on this subject.

Posted by: Eric E on October 22, 2008 at 11:09 AM | PERMALINK

If taxation is necessarily 'distributing the wealth', then Norman Rogers is a Socialist. Who knew?

If a credit card user can't pay their bills, then the company makes less profit. But, the credit card user may go bankrupt, lose their home and live in destitution.

Their outcomes are hardly the same.

Posted by: MarkH on October 22, 2008 at 11:37 AM | PERMALINK



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