On Track...to a Train Wreck

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Published : February 09th, 2012
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For the bulls, yesterday's news of a much higher-than-anticipated jump in consumer borrowing is yet more proof that the recovery is on track:


"U.S. Consumer Credit Climbed by $19.3B in Dec." (Bloomberg)


Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans.


Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington. The gain topped the $7 billion median forecast of economists surveyed by Bloomberg News and followed a $20.4 billion advance the prior month.


Consumers “are willing to take on this debt because there is some increasing degree of confidence in the economy,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected credit would climb by $15 billion, the highest in the Bloomberg survey. “Consumers over the past several years have done a pretty good job of repairing their balance sheets.”


An improving job market may be giving households the courage to take on more debt in order to sustain spending, which accounts for about 70 percent of the economy. At the same time, increasing dependence on credit may be an indication the gains in employment have yet to push wages high enough to single- handedly give consumers the means to keep shopping.


Unfortunately, as the Rochester Democrat and Chronicle writes in "Report: Student Debt Could Be Next Economic Bomb," this particular track looks to be leading us to another train wreck.


Student debt is looming as a national problem that could have repercussions reminiscent of the mortgage crisis, says a new report by the National Association of Consumer Bankruptcy Attorneys.


The study, released Tuesday and based on a nationwide survey of 860 bankruptcy lawyers, said that bankruptcy attorneys nationwide are seeing at the ground level "what feels too much like what they saw before the foreclosure crisis crashed onto the national scene."


The report calls for a change in bankruptcy laws.


In the survey, 81 percent of respondents said that potential clients with student loan debt have increased "significantly" or "somewhat" in the last four years.


And 95 percent of respondents reported that few student loan debtors have any chance of discharging what they owe through a bankruptcy proceeding because they have to prove "undue hardship" — a standard that is difficult to meet.


The total debt from student loans is about $1 trillion, about 14 times more than 15 years ago and well above the estimated total credit card debt of $798 billion.


...


The report urges a change in bankruptcy laws so that those burdened with student debt would be on the same footing as others in debt facing bankruptcy.


"It's not fair and needs to be corrected," said U.S. Rep. Steve Cohen, D-Tenn., sponsor of legislation that would make changes sought in the report.


...


William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, offered a warning.


"Take it from those of us on the frontline of economic distress in America," he said. "This could very well be the next debt bomb for the U.S. economy."


Of course, Wall Street knows better -- right? Otherwise, why would they keep buying stocks?


Michael J. Panzner 


 

 


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Michael J. Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, published by Kaplan Publishing.
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