Delinquency Debt & the Collections Crisis
The 2008 Financial Crisis is often attributed to a sudden freeze in liquidity
in the Shadow Banking System, stemming from borrower default problems within
the securitization of Mortgage debt.
Six years later we have an even larger problem which is now associated with
a national sub-prime economy securitizing its debt through the same unregulated
Shadow Banking System. As prior to the 2008 Financial Crisis, credit regulations
are once again mistakenly being quietly changed to increase credit flows.
As Yogi Berra said: "Its Deja vue all over again!"
A Bigger "Collections" Crisis
The US collections problem is with little doubt worse than it was six years
ago once the government and its' credit pusher lobbyists' 'spin' is removed.
- 77
Million Americans face debt collectors.
- 35%
of Americans have debt in Collection. Roughly, every third person you
pass on the street is going to have debt in collections. The average is
$5,178.
- Roughly
1 out of 20 (5.3%) of people with a credit file are at least 30 days
late on a credit card or other non-mortgage account (e.g., automobile loan,
student loan).
- A staggering 70% of census tracts have at least 25% of people with reported
debt in collections. This means it is a US wide problem.
- Health
care-related bills account for 37.9 percent of the debts collected,
according to a new report commissioned by the Association of Credit and
Collection Professionals. Student loan debt represents another 25.2 percent
and credit cards make up 10.1 percent, with the rest of the collections
going for local governments, retailers, telecoms and utilities.
- According to a new study by the Russell
Sage Foundation, the inflation-adjusted net worth for the typical household
was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline...
Welcome to America's Lost Decade. Simply put, the
NY Times notes, it's not merely an issue of the rich getting richer.
The typical American household has been getting poorer, too.
- Tow trucks in America no longer have Towing on the side of the trucks but
instead has been replaced with TOWING & RECOVERY. Think of it, everyone
is driving new cars they can't afford so towing is small business but 'recovery'
is now their primary business.
The American family is broke.
Government Policies of Financial Repression have crippled savers and pensioners.
The US middle class which feeds the 70% consumption economy has been 'gutted'
with escalating costs in health & education, removal of defined benefits
for retirements while have real disposable income shrunk.
The 70% Consumption Economy Problem
The government is caught in a trap where it perceives it must increase credit
to thereby increase consumption to sustain a 70% consumption economy. It has
only so many options available as shown below.
Government's Only Response: Change the Rules
The simple truth is after an initial period of "Extend & Pretend" Policies,
then replaced by "Kick-the-Can-Down-the-Road" Policies it has resorted to "Fake
It Until You Make It. To do this they are changing the credit rules. When governments
get into a problem you can always count on them to change the rules. John Rubino
and I in this 30 minute video show how the government is doing this regarding
Credit Card FICO scores, Car Loans, Student Loans, Mortgages and HELOCS.
Sub-Prime II Video
Why It Won't Work
All of this is a waste and won't work. Citi Rob Buckland's lays out the four
cycles of credit:
Phase 1: This begins at the end of a recession, when interest rates
have fallen, money is cheap, but stocks are still battered.
Phase 2: A bull market sets in during phase 2, when stocks start to
rise as easy credit lubricates the economy.
Phase 3: This is the tricky part. Stocks are still flying high, but
credits spreads are widening as investors become increasingly unwilling to
finance further risk. Corporate CEOs have now experienced a lengthy period
of gains and become risk-happy. (And we'd note that central
banks are already talking about tightening credit by raising interest rates.)
Bubbles can form in Phase 3, Buckland says, as the high-flying stock market
ignores the early warning signs of the deteriorating credit market. Hello,
tech startup IPOs!
Phase 4: Stocks react to the lack of available credit by collapsing,
and we see the kinds of things you get in a recession: "This is the classic
bear market, when equity and credit prices fall together. It is usually associated
with collapsing profits and worsening balance sheets," Buckland says.
We're in Phase 3 right now, Buckland says, but we may not be very far into
it. Here's (Click to see Buckland's
checklist of warning signs for Phase 3) .
Conclusions
60% of the families in America have absolutely no buffer for an emergency
except to increase their debt levels. A third have nothing saved for retirement
with the private sector no longer having meaningful pension plans.
The whole system is being financed within the Shadow Banking System which
is borrowing short and lending out long to the Sub-Prime Economy. It is ripe
for someone to yell "fire" and to see short term liquidity implode as it did
in 2008.
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