The Big Bank Problem No One Talks About

Consumer credit in the USA is falling, falling, falling. Whatever numbers you pick, there's no massaging the data to make it look innocent. This all is well known, as is the concern that lack of consumer borrowing will be a drag on the consumer portion of the economy.

Something else about this situation seems to be slipping through the cracks of public awareness, however. Once upon a time, maybe twenty years ago, when lenders cared a lot more about credit quality, it was well known that subprime could never work as a profitable lending model. Too many companies had come and gone promising to be profitable lending to high-risk customers. Their seeming profitability was a trick of accounting legerdemain: a growing book makes loss ratios look lower than they actually are since ageing loans are more likely to sour than fresh ones.

In the huge, recent credit bubble when almost everyone (and sometimes their pets) were receiving credit offers, loan books were growing smartly and loss ratios were low. Now that credit is contracting, people who can pay back their loans tend to be doing so. And those who can't (but are not yet to the point of defaulting) are just trying to keep them rolling over. The net result is that the overall quality of bank's loan books is deteriorating rapidly.

Banks are becoming less solvent over time, not more so, in spite of their efforts to improve their condition. Banks efforts to reign in credit by jacking up interest rates and cutting credit lines will actually backfire because better borrowers will simply pay off their loans. Borrowers who accept the barrage of insults are in such poor condition financially they can only subject themselves to usury.

In conclusion, the end state of this process will likely be the Federal Government (having had to bail out the banks and then the FDIC over and over) holding consumer loan portfolios that have little to no value. Cost to taxpayer: something like two trillion dollars, and further debauchment of the Dollar. Banks will be kept in business to keep up appearances, and may even book a nominal profit.

October Credit Card Collapse Report

It has been a while since we provided an update to the story of the great credit-card pay-down. According to Federal Reserve data on US household revolving debt, consumer revolving loan (mostly credit cards) balances have declined 9.17% from year-end 2008 through August. This represents an annual rate of - 14%.

Given the high credit card delinquency rates lenders are suffering (5% at last report), much of this balance decline can probably be chalked up to charge-offs. This implies households are not (contrary to popular opinion) actually paying down their debts to any great degree. In the aggregate, non-defaulting households are actually only gradually reducing their debt level. Since we have direct knowledge that at least some people really are paying down their debts furiously, this means others are getting in deeper.

The tenacity of the credit card balances could offer alternate interpretations. It is possible that household finances are in OK shape, and that people are confident about their prospects for the future. On the other hand, it could be that many, many people are desperate for funds to pay the bills, and thus borrowing (instead of cutting spending) in the face of declining income.

Since we opine that we are in a Depression - one of the defining characteristics of which is declining income, we favour the second interpretation. If true, this bodes very ill for the profligate households, and not so good for the rest of us in the months ahead.

The Herbert Hoover Award

Unlike the popular phrase would have it, History never repeats itself; rather, History will be eerily parallelled. For example, the 2007 Depression does not repeat the 1929 Depression, but it is closely related. Instead of President Herbert Hoover talking about permanent prosperity, the present has President Barack Obama talking about the work needed to bring back permanent prosperity. Close, indeed, but not an exact repeat.

In honour of that parallelism, we present the Herbert Hoover Award. This Award will be given weekly to the individual (or group) which demonstrates ignorance of History by repeating the painfully obvious mistakes of the past. Without further ado, let us now turn to this week's winner of the Herbert Hoover Award! Presenting (drum-roll):

Illinois Governor Patrick Quinn

In a recent speech before the City Club of Chicago, Governor Quinn said that massive budget cuts were in store for the State, unless the legislature agrees to a 50% hike in the income tax.

"It’s no fun whatsoever to propose higher taxes on anyone, whether it’s families or business, but if we don’t do this, if we don’t repair our state and get it back in order we will regret it till kingdom come.” [source]

Apparently Governor Quinn is not aware that raising taxes during a depression, a credit crisis, rising unemployment, and social discord is a very bad idea. According to these excellent graphics from iTulip, the United States is suffering from a sharply rising unemployment rate. Illinois is not immune to the effects of the Depression. We have no doubt that, if this 50% income tax hike is passed, the citizenry of the State will suffer all the worse.

Congratulations, Governor Quinn. Your trophy is in the mail.

Disaster Economics

We remember the flap surrounding the origins of the TARP, when former Treasury Secretary Hank Paulson, Jr., told Congresspersons that martial law would have to be declared if the bailout were not quickly passed. If memory serves, words like 'catastrophe' and 'crisis' were bandied about. A dystopian landscape was painted for the poor elected officials, who apparently weren't intelligent enough to seek a second opinion.

Fast forward to today... and we find President Obama making more-or-less the same comments, albeit without the martial law part. Still, suddenly it's just fine to be using the very same phrases that netted Bush flak. The economy is in "a crisis," so the money's got to flow fast and furious to prevent "a catastrophe," says the new President.

"This economy needs support," whines Mr. Bill Gross, or else the United States will enter a "mini depression." By "this economy," we assume that Mr. Gross means his mutual fund portfolio, but we could just be cynical.

All this rhetoric is at once silly, and disturbing. If the Government and big-shot Investorati types manage to keep the citizenry of the United States in a state of reactive fear, any amount of deplorable -- if not downright illegal -- actions will likely be taken. Fear, above all, makes the average person less able to read the fine print... and there will be a lot of fine print in the months ahead.

Welcome to Futility, Mr. President

Now that President Obama has enjoyed the first day of the next four years of his life, we would like to take stock of the situation. In one fell swoop he has inherited a blown-out national economy, a global credit crisis of biblical proportions, two desultory wars of occupation, and the thankless task of fixing everything. No pressure, sir, no pressure.

Since it seems that a mass delusion has gripped many people across the globe, we feel it is our duty to break the bad news: President Obama will not make good on his bright, shining future. He is many things, this is true, but he is not a miracle worker. He is, first and foremost, a politician, and politicians can always be trusted to not be trustworthy.

All that said, he probably does realise the enormity of what is expected of him: 'fixing' the United States' economy, and indeed the world's economy. However, 'fixing' entails choosing some serious, mind-altering pain. He strike us as the sadomasochistic type of a different breed, to be honest, so we doubt he will do anything helpful. Instead, he will put the Citizenry of the U.S. -- not to mention other nations of the world -- through an entirely different, and worse sort of pain.

In the grand scale of things, we truly feel that the 2007 Depression is going to be far more painful than the 1929 Depression. At the same time, President Obama is not the Franklin Roosevelt of the 21st Century. He is, instead, the Herbert Hoover: the 2007 Depression has only just gotten started, and it's all downhill from here.

Good luck, President Obama.