Economic Roadkill

Why the Fed's Consumer Credit Report is Rotten to the Core

by MIKE WHITNEY

If you really want to know what’s going on with the economy,  you should take a look at the Fed’s Consumer Credit Report that was released on Thursday. Yes, it’s a real snoozer, but it does reveal the truth behind all the “recovery” hype. So, let’s cut to the chase: When unemployment is high and wages are stagnant, the only way the economy can grow is through credit expansion. That’s why economists pay so much attention to the credit report, because it lets them see if we’re making progress or not. Right now, we’re not making any headway at all. Of course, the cheerleading media see things differently. Here’s a clip from an article in Bloomberg that puts a positive spin on a truly dismal report:

“Credit increased $12 billion after a revised $11.3 billion rise in June, the Federal Reserve said today in Washington. Economists projected a $6 billion gain, according to the median forecast in a Bloomberg News survey. The rise in non-revolving loans was the most since November 2001.” (“U.S. Consumer Borrowing Rose by $12 Billion in July, Twice Amount Forecast”, Bloomberg)

Hooray!  The US consumer is off the canvas and borrowing again. Let the celebration begin!


Not so fast. The uptick in credit spending is entirely attributable to subprime auto loans and government-backed student loans, both of which are a mere extension of the same Ponzi-finance scam that put the global economy into cardiac arrest. Every other area of credit expansion is on-the-ropes. Commercial banks, finance companies, credit unions, savings institutions, nonfinancial businesses, and pools of securitized assets are all flatlining. No progress at all. In other words, the only way to induce tightfisted consumers to spend money they don’t have is by either seducing them with “No-down, easy-pay, 60-month-no-interest” financing or by hoodwinking them about the 6-figure income they’ll net after they finish their college education at Lunkhead U.

Case in point; check out this article on subprime auto loans in Reuters:

“Lenders are making more subprime auto loans again, reversing the cautious approach they adopted after the credit crisis, an industry research firm said on Tuesday. The portion of car loans made to subprime borrowers rose to 40.8 percent in the second quarter from 37.2 percent a year earlier, according to Experian Automotive, a unit of credit bureau and research firm Experian Plc.

The data shows how keen lenders are to boost their loan books amid a sluggish economy….

Average credit scores for borrowers declined and the average term for their loans extended by one month to 63 months on new cars and 59 months on used cars, according to Experian.

“We are continuing to see growth in subprime, both new and used, and loans are becoming looser,” Melinda Zabritski, director of automotive credit for Experian, said in an interview.

Executives at Ally Financial said in May that subprime car lending had become “very attractive” because profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay what they owe. Making the loans is part of Ally’s strategy to grow by lending on more used cars….

Industry veterans have said that while the loans have been attractive recently, more lenders are entering the market and competing for business by lowering prices, a trend that could lead to higher losses in the future.” (“Lenders making more subprime car loans: report”, Reuters)

Bigger profits off lower credit scores. Now where have we heard that load of malarkey before?


Can you believe it? I mean, we haven’t even paid for the last subprime meltdown, and we’re on to the next? Do you think a little regulation might be a good idea here, like maybe some standardized loans so the banksters running these loan-laundering operations don’t blow up the system again and come around begging for more bailouts?


Oh no, of course not. That would be an intrusion on the divine workings of the free market.


Bottom line: Yes, it is possible to boost credit if one is willing to lend gobs of money to anyone who can fog a mirror, but is that really an indication of “economic recovery” or just more proof that the system is staggeringly out-of-whack?


And then there’s the student loan biz, as big a fleecing operation as ever existed. This is where the real pros hang-out now, luring their prey with promises of hefty salaries after they graduate and then loading them up with enough debt to make their eyes pop out.   But, hey, let’s not forget the upside of all this chicanery; all that fleecing beefs up the Fed’s Credit Report and makes it look like the economy is bouncing back. That’s got to be worth something, right? And, besides, everyone is “doing it”; fleecing college kids, that is. Here’s an excerpt from an article in The Atlantic:

“How do colleges manage it? Kenyon has erected a $70 million sports palace featuring a 20-lane olympic pool. Stanford’s professors now get paid sabbaticals every fourth year, handing them $115,000 for not teaching. Vanderbilt pays its president $2.4 million. Alumni gifts and endowment earnings help with the costs. But a major source is tuition payments, which at private schools are breaking the $40,000 barrier, more than many families earn. Sadly, there’s more to the story. Most students have to take out loans to remit what colleges demand. At colleges lacking rich endowments, budgeting is based on turning a generation of young people into debtors.

As this semester begins, college loans are nearing the $1 trillion mark, more than what all households owe on their credit cards. Fully two-thirds of our undergraduates have gone into debt, many from middle class families, who in the past paid for much of college from savings. The College Board likes to say that the average debt is “only” $27,650. What the Board doesn’t say is that when personal circumstances go wrong, as can happen in a recession, interest, late payment penalties, and other charges can bring the tab up to $100,000. Those going on to graduate school, as upwards of half will, can end up facing twice that.”  (“The Debt Crisis at American Colleges,” The Atlantic)

Do you think these pillars of rectitude would ever dream of warning our kids that they might they might be getting in-over-their-heads, that they might want to reconsider what they’re doing so they don’t spend the rest of their lives trying to get out of the red?


Nah. It’s not my problem, they figure. Besides why rock the boat. If these kids ever figure out that they just flushed $100,000 down the latrine for a mid-level management job at Herfy’s that pays $22K per year with no-time-off, they might just go ape and torch our lovely new sports pavilion. We can’t have that, now can we?

Here’s more from another article in The Atlantic:

“Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

How does the housing bubble debt compare? If you add together mortgages and revolving home equity, then from the first quarter of 1999 to when housing-related debt peaked in the third quarter of 2008, the sum increased from $3.28 trillion to $9.98 trillion. Over this period, housing-related debt had increased threefold. Meanwhile, over the entire period shown on the chart, the balance of student loans grew by more than 6x. The growth of student loans has been twice as steep — and it’s showing no signs of slowing.

Obviously the number of students didn’t grow by 511%. So why are education loans growing so rapidly? One reason could be availability. The government’s backing lets credit to students flow very freely. And as the article from yesterday noted, universities are raising tuition aggressively since students are willing to pay more through those loans.

All this college debt could put the U.S. on a slower growth path in the years to come. As Americans grapple with high student loan payments for the first few decades of their adult lives, they’ll have less money to spend and invest. All that money flowing into colleges and universities is being funneled away from other industries where it would have been spent in future years. Of course, this would be a rather unfortunate irony: higher education is supposed to enhance a nation’s growth, but with such an enormous debt burden, graduates might not be able to spend and invest enough to allow that growth to occur.” (“Chart of the Day: Student Loans Have Grown 511% Since 1999″, The Atlantic)

Anyway, you get the picture. Young people are just the latest subset of victims in Big Capital’s endless search for roadkill. No sense getting all huffy about it. But it does help to shed a little light on underlying condition of the economy vis a vis the Fed’s Credit Report.


Indeed, credit is expanding, but only in the areas where the sinister lifting of consumer protections (deregulation) has allowed finance vultures to do their dirtywork. As for the economy, it still stinks. But, then, you already knew that.

The Fed's Credit Report

No Light in the Tunnel
By MIKE WHITNEY

On Monday, the Federal Reserve released its Consumer Credit Report which showed that consumer credit increased at an annual rate of 2.5% in January. That might sound like good news, but there's more here than meets the eye. Non-revolving credit increased at a rate of 7% per anum, while revolving credit decreased at an annual rate of 6.5%. So, people are taking out more loans, but using their credit cards less.

What's disturbing about the report is that the two main areas of improvement are auto loans and student loans. Both sectors are built on foundations of sand. After all, the reason that auto sales are booming this year is because the big car dealers are giving away the farm to people with poor credit. As Autonation's President Michael Maroone said last week on the Nightly Business Report:

"The big driver of the recovery in 2010 was the restoration of credit. The change in 2011 is we`re now seeing an improving environment for sub-prime. So last year prime and near prime were more normal and this year we`re starting to see the sub- prime segment come along and that`s very important for our industry." (The Nightly Business Report)

So, we're back to "Square 1", right? GM is offering "72 months zero percent financing" to people with dodgy credit. And then the dodgy loans are being chopped up, glued together, and sold to as bonds to "yield seeking" institutional investors around the world. That's the way the new financial system works, and that's why the system broke down when investors tried to ditch these crappy bonds in the autumn of '08. It triggered a run on the shadow banking system that led to worst financial crisis in 70 years. Now car dealers are back for a double-dip reviving subprime loans to inflate another bubble.

The uptick in auto sales has nothing to do with "organic demand" for autos. That's baloney. It's about getting anyone who can fog a mirror to sign on the dotted line so the contract can be sold to gullible investors looking for higher yield.

Even so, sales did increase on the month, so, technically speaking, there was a boost in credit. The question is whether subprime auto lending is a sign of recovery or not? The answer is "No".

The other area of nonrevolving credit that improved was student loans, which basically represented all of the increase in non-revolving credit aside from auto sales. Think about that for a minute. In other words, the commercial banks, finance companies, credit unions, savings institutions, nonfinancial business and pools of securitized debts all barely squeaked-by or lost ground in January. That's amazing. Virtually every area of non-revolving credit is still flat on its back a full 30 months after Lehman Bros collapsed except for student loans. And the media tries to spin this as good news?

The credit issued via student loans soared from $317 billion to $342 billion from December to January, a $25 billion windfall in just one month. But, as we pointed out in an interview with Professor Alan Nasser, the student loan business is the biggest swindle of all. Bigger than subprime by many orders of magnitude. Here's an excerpt from the interview:

MW--Is it fair to say that the student loan industry is a scam that targets borrowers who will never be able to repay their debts?

Professor Alan Nasser--"It's as fair as fair can be....How many of these students are subprime borrowers? That is, how closely do student loans resemble junk mortgages? The answer hinges on three factors: how these loans are rated, how likely the borrower is to repay, and the default rate on student loans.

Repeat: A default rate of 51%. This is predatory lending writ large.

So, when we talk about student loans, we're not talking about something that strengthens economic recovery. We're talking about a scam that targets vulnerable young people who want to play by the rules so they can make a positive contribution to society. These kids are getting fleeced by shyster banksters and loan sharks whose only interest is lining their own pockets. Most of these students will be in debt until the day they die. (Students are not afforded any of the consumer protections of other borrowers. They cannot shed their debts through bankruptcy.)

So, apart from these dubious "improvements" in non-revolving credit, the Fed's credit report is really pretty grim, much as one would expect when households are still deleveraging from a gigantic financial meltdown that cost them $11.4 trillion in personal wealth and home equity.

So, why does it matter? What difference does it make if people are borrowing or not?

It matters a lot. Economists watch credit expansion very closely to see how the economy is doing. You see, when wages stagnate--as they have for the last 30 years---the only way that working people can increase their spending is by borrowing. And since consumer spending is roughly 70% of GDP, if consumers don't borrow, then the economy doesn't grow.

So, the credit report is really bad news on many levels. First, it shows that the only thing that has kept the economy on life-support has been the government deficits which have made up for the loss in private spending. Second, it shows that consumers are only slightly better off than they were in 2008. (and less inclined to take on more debt) And, finally, it shows that the Fed's QE2 (bond buying program) has had NO measurable effect of consumer spending/credit at all. While it's been a god-send for the equities markets, it's been a total bust for consumers.

Don't believe the "Happy Day's Are Here Again" blabber. Two and a half years into the so-called recovery and the country is still in the throes of a severe multi-year depression. The Fed's Credit Report proves it.

Foreclosure Funny Business

How Banks Really Work
By DEAN BAKER

Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine print provision that we overlooked. Sometimes begging by good customers can win forbearance, but usually we are held to the written terms of the contract no matter how buried or convoluted the clause in question may be.

That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

The problem is that when mortgages got sliced and diced into various mortgage-backed securities it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove that they actually have a claim to the property.

If the servicer followed the law on carrying through foreclosures then itwould have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.

GMAC, the former financing arm of GM, has become the poster child for these sorts of practices. Jeffrey Stephan, a leader of one of its foreclosure units, acknowledged that he had signed thousands of affidavits claiming that he had reviewed documents that he had never seen.

In addition to being a major subprime lender during the heyday of the housing bubble, GMAC -- following its collapse last year -- also has the notoriety of being primarily owned by the federal government. This fact may ensure greater accountability at GMAC, but there is no reason to believe that its practices are qualitatively different than those of other servicers carrying through foreclosures. The basic point is that the banks foreclosing on homes don’t feel that they should be held to the letter of the law like ordinary people.

As we approach the two-year anniversary of the Troubled Asset Relief Program it is certainly understandable that the big banks would think that the laws that apply to others don’t apply to them. After all, the lesson of the TARP was that when the banks got themselves into trouble with their reckless lending, the taxpayers would come to the rescue with whatever loans and guarantees were needed to keep them in business.

In fact, many of the bankers who were begging Congress for below-market loans two years ago are now bragging about having paid back the money with interest. This should prompt ridicule. Instead, all the reporters and columnists who were too thick to see an $8 trillion housing bubble are repeating the banks’ lines and telling us how happy we should be about the bailouts.

In the financial crisis of two years ago, these banks would have been forced to pay enormous interest rates to borrow money in private markets. This would have pushed most of them into bankruptcy.

Instead, the Treasury and the Fed gave them money at near-zero cost. This was an enormous subsidy that allowed them to stay in business. It’s nice that the banks tossed us a few nickels in interest, but the taxpayers preserved trillions of dollars in wealth for their shareholders, top executives and creditors. We would have a very different economy, with a very different wealth distribution, if we had allowed the magic of the market to do its work on the financial industry.

But, that’s history. The current issue is whether we will again grant special treatment to the financial industry by allowing them to skirt the legal procedures required for foreclosures. In the land of endless affirmative action for the rich, the smart money is on the banks. After all, huge multi-national banks can’t be expected to read all the fine print that binds the rest of us.