Yves here. Note that the deterioration in subprime loan repayments is at odds with cheery stories at Bloomberg like Even Low Earners Have Money to Spend.
By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
OK, we’ve got a situation in subprime consumer loans. The delinquency rate on credit-card loan balances at the nearly 5,000 smaller commercial banks in the United States – this means all banks except the largest 100 – is blowing out, according to Federal Reserve data. In the third quarter, the delinquency rate at these banks rose to 6.25%. That’s higher even than during the peak of the Financial Crisis.
Back in 2016, the credit-card delinquency rate at these banks was in the 3% range. It has more than doubled in two years.
Credit card balances are considered delinquent when they’re 30 days or more past due. This delinquency rate means that out of the banks total credit card balances, 6.25% are 30 days or more past due. This is a disturbingly large rate.
But delinquencies are a flow. Balances are removed from the delinquency basket either when the customer cures the delinquency, such as catching up with past-due payments, or when the bank “charges off” the delinquent balance against its loan loss reserves. But as these delinquent balances were taken out of the delinquency basket, even more new delinquencies fell into the basket, and the delinquency rate rose.
Subprime auto loans have also been blowing out. In the third quarter, the serious delinquency rate of the $1.3 trillion in auto loans has risen to 4.71%, the highest since the worst months of the Financial Crisis, when the auto industry collapsed, and when the US was facing the worst unemployment crisis since the Great Depression. In the third quarter, about 21% of all subprime auto loans were seriously delinquent – meaning 90 days past due.
Then we got another glimpse of this upheaval in subprime with some of the specialized lenders that cater to them.
For example, World Acceptance Corp., which does small short-term consumer installment loans, and some larger medium-term loans to people who need money desperately and have subprime credit ratings. Like most specialized subprime lenders, World Acceptance charges blistering interest rates, but then it also has large default rates.
It reported disappointing results now two quarters in a row, and its shares have plunged 45% over the past four months. So what’s going on here?
Back in 2009, people were defaulting on their auto loans and credit cards and their installment loans because over 10 million people had lost their jobs. This is not the case today. Back then, new unemployment claims – a sign of layoffs – spiked to astronomical levels. These days, they’ve been hovering near historic lows. So today, these people are working, andthey’re falling behind on their debt service.
Subprime doesn’t mean poor or uneducated. Subprime means having a credit score below 620.
For example, a family of two working adults and two kids: The household income is $200,000. They bought a house and stretch to make the mortgage payments. They bought nice cars and have to make payments. Their kids cost all kinds of money, and it adds up, and they’re spending every dime they make. Then one of the earners gets seriously sick and can’t work for a few months, and the deductible on their health insurance is $4,500, and soon their six credit cards are maxed out.
So they go through daily triage about what to pay: mortgage payments, auto loan payments, minimum payments on their maxed out credit cards, groceries, clothes for the kids, bills, gas, and so on. And they fall behind, and late fees are racking up, and their credit score drops below 620, and they’re subprime.
They can still borrow, and they can still get more credit cards, but now under the terms of being subprime.
So banks take risks on credit cards because credit cards are immensely profitable. Until they’re not. Credit cards – unlike auto loans or mortgages – are unsecured loans. And recovery when the loan goes sour is small. The bank may sell the delinquent credit-card account to a debt collector for cents on the dollar and that’s all it may get.
The hope is that income from interest and fees from other subprime credit cards that are still current are making up for the credit losses. The whole thing is structured that way.
So the banks take big credit-card risks for big profits. And when the losses pile up, at least at first, they’re just part of the cost of doing business. The calculus works out in good times, and snaps back in bad times.
We can use the nearly 5,000 smaller banks with their credit-card delinquency rate of 6.25% as a stand-in measure for subprime. Here is why:
The largest 100 banks have a delinquency rate of just 2.56%, which remains low by historical standards, and is just a small fraction of the peak delinquency rate during the Financial Crisis. They can offer the most sophisticated incentives and marketing to attract the prime-rated customers. Overall, they have most of the customers and most of the credit card balances. And they get the lion’s share of prime customers. They also go after subprime. But since they have the lion’s share of prime customers, the portion of subprime customers don’t weigh heavily in the mix.
But smaller banks can’t offer the same kinds of incentives and marketing and often miss out on prime customers. So proportionately, they end up taking more subprime customers, including those that were turned down by the largest banks. And in this way, they become a measure of subprime credit card delinquencies.
But why are credit card loans and auto loans and other risky consumer loans now running into this kind of turmoil, when they hadn’t in 2016? There is no employment crisis. We haven’t seen millions of people getting laid off. But there is something else going on here.
I can see two factors.
One factor in the subprime turmoil is greed. People with a subprime credit score know their credit score. They know they’re having trouble borrowing. They’ve been turned down. They can’t buy a car and finance it at the ultralow interest rates they see in ads because they don’t qualify. Same with credit cards. They tried to get the 2% cash-back credit card with no annual fees and 7.9% APR and got turned down. They’re now conditioned to take whatever they can get.
In other words, for the industry, they’ve become sitting ducks. Lenders offer them credit cards with the highest interest rates and the biggest fees. Auto dealers make big-fat profits off these folks. And specialized subprime lenders charge them dizzying interest rates to finance these cars.
That’s all they can get. No one forces these people to take those loans and credit cards, but they’re trying to maintain their lifestyle, however basic it may already be, and they’re trying to feed their kids and drive them to school, and so they borrow at these high rates to make ends meet.
But the high interest rates increase the probability of default because these people who are already strung out will have even greater trouble making the payments. That part is driven by the industry’s greed. Aggressive subprime lending went into overdrive starting in 2014, and private equity firms piled into it, and smaller banks went after it, and it’s now coming home to roost.
The other factor in the subprime turmoil may well be something else, something that would impact people the most who are already strung out, people who have jobs but they’re living from paycheck to paycheck, and not necessarily because they’re splurging, but because, at their level of the economy, prices of goods and services they need have risen sharply and outpaced their incomes. And this can happen overnight.
This includes healthcare costs, and it includes food costs, and apartment rentals, and cars have gotten a lot more expensive, and the like. But cars and apartments and cellphones have gotten a lot better too, and these quality improvements are added to the price. Think of the move over the years from a four-speed automatic transmission to an eight-speed automatic, or from two airbags to 10 airbags, or from a basic cellphone to a smartphone.
But for figuring the inflation measure of the Consumer Price Index, the costs of these quality improvements are removed from the index. This is the principle of hedonic quality adjustments.
Inflation measures the loss of purchasing power of the dollar: what the same thing costs over time. But when quality improves, such as in a car, it’s no longer the same thing, and the costs of those quality improvements are removed from the inflation index.
So the CPI for new cars has been essentially flat since 1995, meaning no inflation for 20+ years, when in reality, the actual prices have jumped. For example, the price of a new Toyota Camry jumped by 25% between 1995 and 2019.
With used cars, it’s even worse. The CPI for used cars has declined by 11% since 1995. But actual used car prices have soared since then.
This goes for many other products and services across the spectrum. And then consumers, even when their income rises faster than inflation as measured by CPI, run into this problem where their income no longer suffices to buy these goods and services, including used cars and health care or housing, because actual prices of these goods and services have far outpaced both inflation as measured by CPI and wage increases.
This goes increment by increment. What might have worked last year, suddenly doesn’t work anymore this year. These consumers with jobs, that have been living from paycheck to paycheck, suddenly find themselves confronted with a 20% increase in health insurance premium or a 10% increase in rent, or both.
And suddenly, their whole fragile equation doesn’t compute anymore, from one day to the next. And they fall behind. As more consumers are getting caught up in it, subprime starts to blow out, even in what are considered the good times because actual prices have outrun these people’s incomes, and they’re confronted with it, such as with rent or healthcare, from one day to the next.
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One thing I have never understood, is why do people say that inflation is driven by having too much money in the system? That seems backwards to the actual timeline of what happens. Price of good or service goes up, regardless of input costs, suddenly I need more money to pay for it. IMHO inflation is driven by greed, since businesses will always charge as much as possible while paying as little as possible — and the difference between those two figures is vastly greater than it was decades ago, thanks to free trade, labor arbitrage, and effective deregulation. We’re screwed.
I also think that the idea that inflation is caused by the money supply is backwards: actually the money supply is caused by inflation, as prices go up, wages go up, and therefore balances also go up (balances make for most of the money supply).
But there is a cultural tendency to see “savings” as something real, not as just an accounting gimmick, so the “money supply” is taken as something real, and an increase in the “money supply” as a great crime against nature.
In my experience, wages don’t go up. At least, not much. My wage has roughly doubled since 1996, but the problem is everything else has quadrupled, regardless of wages.
Have wages *really* gone up if everything else has gone up even more? No.
So, which came first, and who has the most negotiating power?
I have one reference job that I check from time to time, the wage for that job (entry level) has in 17 years gone up by in total 10%. (Dublin, Ireland where rents can increase by 10% per year). It would make sense to me to increase minimum wage by at least half the inflation rate per year, the rising tide lifts all boats so doing that would lift the salaries of the CEOs as well, right? :)
Sometimes I think the CEO’s would rather have a more gigantic share of a smaller pie, than a larger pie with more for everyone, but proportionately somewhat less for them.
I guess I’m saying that money is really just all about power — nothing profound in that.
Elites choosing a big piece of a smaller pie is most of the economic history of the last 500…and last 5000 years. Until the seventeenth century in Europe, that choice manifested itself primarily in a political economy built around rents rather than profits. Rent-driven economies grow slowly and are fragile, so the pie stayed small. The possibility that profits on capital would bring in a much bigger slice of pie only became visible, really, to most economic actors, starting in the nineteenth century. Profit-driven economic growth did raise all boats, however haphazardly, from the early eighteenth to the early 20th century, followed by some social democratic political movement that favored pie redistribution, which wasn’t blocked by the usual suspects because of fear and crisis (and because their slices remained replete).
The return to rent-driven economics, turbocharged by big data and much more self-conscious exploitation, is not a good direction to be going in, but it appears to have been the biggest change factor in the global economy since the 1980s. The risk of crisis and systemic fragility that high-rent extraction generates are rising, it seems to me.
Probably some of the multi-generational dynastic families of great wealth . . . on whose behalf the CEOs do their CEOing . . . would prefer a bigger power slice of a smaller power pie. At some point they become motivated by sadism rather than just greed.
That is precisely what Kalecki argued generally about the businessmen, that if there is full employment, they have less power over workers and a lower status difference relative to them too. I remember when I was a kid that what I now realize were blue collar men parents could afford to have at home wives, a house and a car, and even in Escanaba, a second home (a cabin in on a lake nearby) or a boat. The wife might work a bit for some extra dough but that was if they wanted nicer things (like vacations where they traveled) or the wife liked getting out of the house.
a few years ago, i came across a receipt from wal mart from 1994. from this, i determined that a sack of catfood had increased in price by about 300% in 20 years.
comparing this to the official numbers is enlightening.
and your memories of blue collar prosperity gel with my own.
all that has gone away in my lifetime…and the frustrating part is that so many folks(like my parents) seem not to have noticed….and/or strenuously try Not to notice.
wage stagnation, obscured by credit creation and the taboo of admitting to anyone that you’re having financial difficulty, as well as the numerous engineered social divisions(one of our main domestic products,lol)…
we have an astounding capacity for denial that serves the interests of our violent, parasitical elite.
Stopped at Walmart this afternoon pre snowstorm. Bought 3 one-gallon containers of water, a bag of potato chips, a bag of M&Ms, and three containers of blueberry muffins. Cost me $18. Someone working minimum wage would have to work two and a half hours to get this stuff and this doesn’t even qualify as food for a meal. Real food would have cost me double. And I constantly read that our food bills are lower than in other countries….
Wage increases not keeping pace with price increases. And, consumers making imprudent choices regarding what to spend money on and how much.
If a lowest-end consumer has enough money to pay rent in order to avoid homelessness OR buy food to avoid starvation, which would be the prudent choice?
I recall as a kid in the 1960s purchasing an entire shopping cart full of food for $15. Now you easily spend $50 to $100 or more just to fill the child seat with a few items. I also am amazed how much people checking out in front of me spend large amounts of money with little or no food value. Colored water, sugar stuff, bread that is all starch and simple carbohydrates (I make my own with whole grains and nuts, probably not only for less per loaf but you need eat very little comparatively to fill you up, and moreover supply nutrients, fiber, etc.), and processed crap. This represents in fact increased price and profit with decreased quality. Similar in effect is the attachment of illusion of social status to many consumer goods and wrapping them in deceptive packaging and advertising.
Yeah, GDP was just over a trillion dollars. You really believe that 15 dollars was really “low” in price????
The “inflation caused by too much ‘money’ (for some definition of ‘money’)” meme is, I think, in part rooted in the assumptions of conventional economics, for example perfect competition, no monopolies or cartels, etc, etc.
Parts of this meme are IMO probably somewhat true, especially if you replace ” ‘money’ (for some definition of ‘money’)” with the Keynesian concept of ‘demand.’ Demand/pull inflation can take place if there is a shortage of productive capacity for what purchasers want to purchase. A good example of this would be “food in times of famine”.
The problem of “hedonic adjustments” to CPI that is pointed out in the WS article is pretty important IMO. People can down-grade the quality of their purchases only as far as the market provides product at a price they can afford. In mainstream economic theory, a properly functioning market would do that. But as WS points out, it isn’t happening in practice. In fact, we are seeing major US auto makers actually EXIT the market for affordable passenger cars. GM, for example, is discontinuing the 3 cheapest models in the Chevy line, the Spark, Sonic and Cruze. Yet there is enormous need for lower-price vehicles.
The example of the auto market mirrors the health-care “market” — there’s inelasticity in demand for autos because they are necessary for survival (for some definition of “survival”, such as avoiding homelessness).
Yes, we are screwed.
To use the car purchase analogy, my hubby & I have only purchased one brand new car in decades. We Always look for a high reliability model, 1-2,years old with 35K or fewer miles. Why? Any and all infant mortality issues have been resolved on warranty by someone else.
My 2007 model FIT Sport purchased in June 2008 now has 270K miles. Highway mileage in high 30’s with regular tires and not AC season. Incredible cargo space for a small vehicle and no really major repairs other than break pads. Of course am OCD on preventative maintenance.
This is certainly good advice and a valuable example for the middle-end and high-middle-end consumers who can afford to take it and apply it.
And I suspect that America probably does have at least a hundred million middle and high-middle-end consumers. If they all took this approach, America might be a little closer to more employment and energy-resource sustainability.
>. . . We Always look for a high reliability model, 1-2,years old with 35K or fewer miles. . .
That strategy is about to blow up in your face with the latest sensor and camera laden crapola cars built in the last several years. The latest Honda Civics with the 1.5 liter turbos are junk. Never mind the venal auto press and the thick creamy layer of Bernays sause applied in reviews. Those engines are very stressed and paired with the CVT automatic are complete garbage. If you dare to get a car only a couple of years old, get a stick shift to give yourself a fighting chance at something that won’t eat your wallet with an out of warranty transmission failure.
The sweet spot of car design was at least two decades ago.
@inode_buddha
November 30, 2019 at 5:50 am
——- and
@Samuel Conner
November 30, 2019 at 9:15 am
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There are 2 types of inflation that are being conflated and/or confused. There is cost-push inflation, and there is demand-pull inflation.
For the past decades we have been suffering from cost-push inflation where the prices of commodities and necessities are rising due to the pricing power of the larger corporations and the greed that both of you mention. A good example is the high inflation of the early ’80’s due to the oil embargo and subsequent price increases.
Demand-pull inflation occurs when there is more money circulating than there are products and services to purchase. This is the type of inflation that most people think of: too much money chasing too few goods.
The last time we had demand-pull inflation might have been WWII, IIRC, when the war effort required much more in the way of raw and finished goods than the US could provide without taking measures to control inflation. Strategies such as War Bonds (to drain purchasing power from the public) and wage/price controls were used. (That’s how we ended up with employer provided health insurance; wages were capped, benefits were not.)
IMNSHO, the hedonic adjustments are a fraud on the public. Anyone who has to budget expenses has seen CPI numbers in the low single digits in recent years, but when they look at their annual grocery bill, it’s up by 12%, even while they have tried to cut back.
The CPI should be restructured to reflect real-world prices for the various items tracked. If you’re tracking cell phones it makes no sense to try to price the increase in the cost of a flip phone for CPI purposes. Very few people are buying those (only the smart folks). The hedonic adjustments create a fantasy world.
The distortions to the CPI have come about ever since Social Security was indexed to inflation. How to raise prices without raising Social Security Benefits. The Academic psychopaths have been working hard on this ever since. We live in an incredibly corrupt society. If your not on the take, you’re a loser! The Greed Monkeys rule. They want it all, because markets, go die. We live in a social Darwinist genocidal culture. Without poverty, great wealth wouldn’t be so much fun, would it?.
When everyone (or even a good portion of everyone) has a truly decent quality of living, including enough leisure time to both be concerned with stuff higher up the hierarchy of needs and to do something about it, the billionaire-class (Ultra High Net Worth Individuals is probably more precise and accurate) runs into two problems.
Billionaire Problem Number One: It’s a lot harder to leverage their wealth into private exemptions from the law, the capture of politics (and thus regulation) and all the other ways they get to both exercise and maintain their power.
Billionaire Problem Number Two: All those proles now have the time and energy to think about how having billionaires exist doesn’t benefit them, their families, or their neighbors one little bit, but rather has a negative effect on what they value. And then they start working on doing something about it.
Instead the billionaires would much rather be a tiny sub-1% fraction of society, and have a powerful class of around 10% or so who do have a very good life (well into the range of enough wealth to be comfortable and then some), but who know that lifestyle depends on the continued existence of the billionaire-class.
including enough leisure time to both be concerned with stuff higher up the hierarchy of needs and to do something about it, Jason Ipswitch
And there’s a dirty little secret of a JG rather that an ethical finance system – including a Citizen’s Dividend to replace all fiat creation beyond that created by deficit spending for the general welfare.
Not to say at all we should not have generous spending on infrastructure but we certainly are not rich enough to pay people to waste their time and never could be if all the hidden costs of injustice are added up.
You’ve nailed it. Any good business raises prices every year until it starts to cost them money.
If people keep paying, the price keeps going up.
According to Wolf Street, inflation is caused by whatever the Fed wants inflation to be, by the Fed’s long term manipulation of reports to drive reported inflation ever lower.
For example, increases in employer health insurance is not counted towards inflation and instead directly added to GDP.
So, this Fed decision of not adding employer health insurance to inflation produces this result:
If the cost of employer health insurance was $10,000 per employee last year, and is 1,000,000,000 this year, the Fed says that is $990,000,000 additional GDP per employee this year, and 0% inflation because employer health insurance is never added to inflation because it is always added to GDP.
Based on the just above alone, the Fed would report 0% inflation, a surge in worker productivity and a huge increase in GDP…making us all much wealthier.
The Fed adds the employer health insurance inflation to GDP but never to inflation, even when life expectancy falls as it has been for the last several years, and quality of healthcare declines.
Instead, the Fed says we are wealthier, more productive, in a zero inflation economy.
Money, after all, is a form of debt, perhaps the earliest form after generalized reciprocity. The anthropologist David Graeber’s book “Debt: The First Five Thousand Years,” lays it out nicely, as did Karl Marx in Capital. Debt in the form of money is being added hand over fist in order to finance war and imperial expansion that the U.S. ruling classes have been engaged in for the past century or so, and particularly the last 50 years. We working classes pay for it with lower purchasing power, increasing debt, and declining well-being. In not so Ancient Rome they used to cut the metal coins into pieces with the same effect for some of the same reasons until the empire imploded.
Without debt, capitalism can’t exist. Economic growth must continue on affinity.
Found this article from ABA Banking Journal about auto loans – What—and Who—Is Driving Delinquencies in Auto Loans?
My interpretation is that auto sales have peaked and in order to boost sales auto companies are providing subprime loans to riskier and older borrowers. It remains to be seen if the 18-29 year old group will become car owners as they age or if not owning a car is a fundamental lifestyle change.
Poor and low-budget millenials may be not-buying cars for the brute-force reason of not having enough money to buy cars.
Someone should look into whether those millenials who are making enough money to buy cars are choosing to not-buy cars anyway.
An excellent observation! Cars are priced outside the means of most millennials and those who can afford cars have had years to learn how to live without them. Most of our cities are extremely car unfriendly and most millennials seem drawn to cities — especially cities with some mass transit. If you got by before without a car, why get a car now that you might be able to afford one?
Most major cities are extremely car friendly, that is correct.
But then what words can we use to describe the situation outside of them, where there isn’t even any public transportation…
New York City never struck me as car friendly. Virtually no parking spaces on the the streets and opposite side of the street parking rules to force people to move their cars in the early morning. In some homes, people use their front lawns as parking spots. Not to mention ridiculous traffic on the highways for those that dare to drive.
out here, if you don’t have a car, you’re doomed.
the short bus that the county runs is wholly inadequate…a mere bandaid, at best…an insult, at worst.
also insulting is the lack of sidewalks and places to sit…even in the big city.
(in san antone(the parts i’ve wandered in), the only public benches are at bus stops, and are generally out to the weather, and unpleasant to sit on.)
we’ll be looking for a vehicle for our eldest, soon…senior, fixin to run off to college, etc.
I have no idea how we’re gonna do that.
even the used grandma cars are priced out of range…and it’s not like i can look under the hood and even recognise anything any more,lol, let alone determine the quality of the workings.
and when my truck goes, eventually(2004 dodge pickup), a mule and a buckboard are looking better and better(since i only use it for once a week runs to town…if not once every two weeks)
like so many other features of our “civilisation”, the bosses are shooting themselves in the foot with their greed and policies that shoehorn everyone into their system:no public transportation, yet more and more impossible to own private transportation is similar to people working at walmart being unable to shop there.
unless, of course, they’re trying to cull the herd…then it makes a certain amount of sense.
I have read that as much as 3/4 of the new jobs created are low-paying. Obviously they don’t pay enough to qualify for a new vehicle. And do not forget that 100 million people are out of work and gave up looking because they can’t find a job. The are not counted as unemployed. In fact, the unemployment rate is a joke; it’s closer to 20%.
Here’s what American Banker has to say about credit card delinquency – What’s behind the rise in credit card delinquencies
Since more young people have credit cards than before there are more deliquencies. Not quite the sky is falling concern but this is troubling –
If someone 50+ is increasing credit card debt I don’t see how they could build up enough of a nest egg to ever retire.
My elderly mother recently passed away. She was born in the late 30’s so a preboomer. She had moved in with us after her landlord in San Franciscio forced her out. $1500 in Social Security doesn’t go very far. I didn’t see her finances until just before she died. She’d wiped out most of her savings in the last year on the copays for cancer treatments. And had about $30,000 in debt on credit cards without any assets to pay it off. No real estate, no car, no boat, no diamonds in a bank vault.
One by one, the credit cards agreed to charge off the debt. Oddly enough, AT&T was the most difficult continuing to charge for a phone that would never be used and insisting that closing the account had to be done in person through several visits to authorized service centers only, etc.
Long way of saying my mother can’t be an anomaly. How many other seniors are in the same boat? I keep reading that charge offs are increasing think of my mother and wonder if a tidal wave of baby boomer debt is coming.
I hope and knock-wood that I might avoid what you allude to in your comment. I intend — though I may lack the courage — to take the ‘Roman’ way out when my afflictions overmatch my fiscal resources. I worry that my children will not be able to reach old-age without the help of some inheritance.
There is little or inadequate public transportation across the U.S. The people in my neighborhood live on subprime credit because if they don’t have a car, they don’t have a job.
I’m sure there are higher income people borrowing to keep living a ‘lifestyle.’
But the level of economic desperation in this country shouldn’t be understated.
Love your writing Rob!
Not to mention that many places in North America people live in food deserts, where fresh produce is not practically available year round without access to a car, due to distance and lack of public transit.
True, you generally need wheels to get any kind of decent job.
On the other hand, I have lived in places where no job was required — you lived off the land. And it doesn’t take much land to do that, nor do you need to own all of it. You simply need permission. Try living in an area where the nearest neighbor is 3 miles away, it’ll give you a whole new perspective.
Frankly, I greatly prefer to live that way (instead of the urban hellhole that I am currently in) simply because I had much more independence and better neighbors.
Try living in an area where the nearest neighbor is 3 miles away, it’ll give you a whole new perspective. inode_buddha
Sounds wonderful. I was raised in a small town but we had a huge lot (and next to the railroad tracts, a bonus for young boys) at the end of a dead end street with a couple hundred yards to the nearest neighbor. In other words, we could do what we wanted on the land with no one complaining in order to protect their property values.
Frankly, I greatly prefer to live that way (instead of the urban hellhole that I am currently in) simply because I had much more independence and better neighbors. ibid
Many a farm boy has gone to the big city and done very well, even (especially?) in NYC.
Not saying it can’t happen, it certainly does. I’ve known a few who went on to urban life and middle management, and did quite well.
However, I think I am thinking ahead — there will eventually be an economic collapse great enough to bring the apocalypse, and in that scenario I strongly believe that those who chose to remain out in flyover will be much better positioned to survive. The cities won’t.
My experience with extended power failures (weeks or more duration) during bad weather seems to bear this out quite well. The local urban areas essentially ground to a halt while my rural friends barely knew the difference.
Oh, I’m not arguing for urban life by any means but rather that country living can produce strong people who can thrive EVEN in an urban environment.
My next move shall be to the country, I hope, and I was encouraged by your comment.
Thanks.
I agree with your assessment of the essential vulnerability of cities. I try again and again to convince my daughter not to become too enamored of life in NYC. When shit hits the fan it will not be the place to be.
The cost of land has risen in step with everything else and is as elusive; certainly within 3 miles of a ‘core’ that offers ready access to other staples of living. People living in rural areas are struggling just as much if not more. You’d have to live there to see it and experience it because there are no reporting mechanisms or any independent news organizations to report on it.
No matter where you live, infrastructure and access to utilities is needed for survival and the cost ‘to live’ is not being accurately reported. Because anyone with any power, no matter how big or how small, is looking to extract whatever they can from others by any means they can get away with.
No one forces these people to take those loans and credit cards, … Wolf Richter
But the system does – a major part of which is an unethical finance system that cheats borrowers and savers alike (and even the banks themselves but they get bailed out to protect our one and only payment system, besides mere coins and paper Central Bank Notes, that MUST work through private depository institutions or not at all).
I like Wolf Richter and I read his column faithfully – but he has a complete blind spot when it comes to the bottom 20% and what they have to deal with. Yes, these people are forced to borrow to maintain their lifestyle, however basic, because the next lifestyle that is below them is homelessness. I don’t think Wolf understands that. It’s like an article he had about student loans and the moral hazard of not paying back those loans. He doesn’t get that the moral hazard happened when the top 10% decided that they could use children’s futures as their private piggy banks.
I also have given up reading the comments to his articles – most of them are incredibly shallow, self-centered people without a whit of morality. All they do is make me angry and I don’t need that in my life any more.
I remember some of the WS commenters from the Housing Bubble Blog. That one turned into a giant food fight, and I left.
He doesn’t get that the moral hazard happened when the top 10% decided that they could use children’s futures as their private piggy banks. The Historian
I’d say it goes back even further to when governments by default, evil design or whatever allowed the money supply, except for mere coins and Treasury or Central Bank Notes, to consist entirely of deposits at private banks.
That fatal neglect is the root of all sorts of problems, imo.
Yup, selective “moral hazard” to back up a particular viewpoint — that’s the sort of thing I call “hypocrisy” AKA “double standards”
Many people fall for the “no interest for 6 months” scam and borrow. When the term is up they don’t have the money to pay off the loan. They are then faced with interst rates of over 21% and dig themselves a hole.
AMEN the system does make it necessary, especially when it comes to student loans. It’s almost like they planned it.
Wolf’s interpretation of the issue of subprime auto loans is somewhat misleading. It isn’t that subprime borrowers are facing more stress leading to increasing delinquencies, rather the mix of auto finance companies loans going to subprime borrowers is increasing.
If you look at the data for banks and credit unions they have the same customers and default rates and are under minimal stress. However the auto finance companies are extending credit to more subprime borrowers.
So what is going on? We may have reached peak auto in America. The 18-29 segment is purchasing vehicles at a lower rate than previous generations and in order to make up for this shortfall auto companies have been extending loans to older and riskier borrowers. Since these borrowers traditionally have higher default rates, loans that were made in the past 5 years to these borrowers are now defaulting.
The real questions are whether the 18-29 group will purchase more autos as they age or have they permanently changed their lifestyle so owning a vehicle is unnecessary. If it is permanent, what will be the effect on car companies and the economy in general?
I’ve read there ia an uptick in purchasing of used cars.
I didn’t have an auto purchase on the horizon, although now it looks like this next year may be the sweet spot for a deal.
I think car rental companies may be running into trouble soon too. And then look out for the deals that may hit the lot.
“I’ve read there ia an uptick in purchasing of used cars.”
Yes, there is, to the point where used car values are actually going up to some extent.
Used cars are not an answer on their own, because those used cars have to come from somewhere, and less new car sales means less used cars.
I bought my first car at 31(~10 years ago), used from someone I knew, for $5k that I had saved. Next car bought at 41(a year ago) for $1500. No loans by choice-the last thing I wanted or needed was to be on the hook to the bank for an auto loan every month. Can’t be sure you can pay it if you aren’t sure you’ll have a job in a year, let alone 4 or 5 years. A lot of people are buying used cars by themselves with saved cash, or that don’t require an official loan. Some borrow money from family, but that’s not going to show up on records. When I talk to younger people, they don’t want to take out a loan just to get themselves a new/newish car. They are going to try to get by with an older car in order to avoid that bank loan. A lot of them simply can’t afford a monthly payment because they don’t make enough, and job security is a thing of the past. My mechanic said the used car market around here is crazy tight. I learned that the hard way a year ago.
On a side note, our local Coop has started a program to help low income people with car repairs.
Two factors might be at play here. The first is Boomers and the second is Boomers.
BOOMERS. As the population of Boomers increases; the number of people who have pretty much everything they need is growing relative to the population at large. We pay cash for everything. Okay, we have 4 credit cards, but we pay them off when due. We own our houses and cars, so our expenditures are dominated by just utilities, services, food, and entertainment. I do not have access to the data, but it would seem that subprime borrowers may be the only borrowers these banks can profit from, so lenders lower their standards.
BOOMERS AGAIN. We Boomers raised our offspring in relative comfort compared to how we were raised. Even our teens had cars (albeit clunkers). Our kids had state-of-the-art TV, videogames, cellphones, laptops, and credit cards. Many of us subsidized post-high-school housing, loaned mortgage down payments, helped with college costs, and indulged their fashion tastes in clothes. One logical consequence of our largesse is that our offspring have conflated wants with needs. For many, the idea of “going without” is just not in their experience. As a consequence, many of our adult children are likely challenged when they need to prioritize household spending, and are at a loss has to how to escape being indentured to the financial system.
Re the Boomers’ offspring: I’m a Boomer and it’s certainly true that my wife and I have raised our daughter that way, although given the fact that all the Boomers around us were doing the same (with the noble exception of one family), we felt we didn’t have much of a choice.
That said, when I was young, my parents were measurably better off and more secure than my wife and I are or ever have been. I thus had something immensely valuable in my youth that my daughter doesn’t have: some assurance that my future would be at least as bright as my parents’ situation at that time. That assurance turned out to be false, but the key thing is that at an early age I was blissfully unaware of the uncertainties and nasty challenges my future would hold.
By contrast, my daughter today holds only the slenderest of hopes that she will be able to attain anything like a middle-class life. On the whole, she’s pessimistic. In part that may be due to her parents’ hovering and pampering (mea culpa), but I think in greater measure it’s traceable to a hard-nosed, realistic assessment of where this society is generally headed. She could be wrong, but this bleak outlook is a big, black cloud hanging over her world.
I share the same concerns for my own children that you expressed for your children. I also spoiled my children, but no more than my parents ‘spoiled’ me. In fact I often ponder whether I have done enough to help my children when I recall all the ways my parents helped me. My daughter lives in the late days of being a young adult and she faces constraints and difficulties I have never faced in my long life. My son — the youngest of my children — could not bear the demands of the world he faced. He suffered a mental breakdown and incarceration in the state mental hospital where he as yet remains — with little hope. I share the bleak outlook you suggest clouds your daughter’s view of the future … and not just for my children but for myself as well.
I am trying to find some place and way of life to survive the coming collapse. I am making efforts to convince my children to follow to where I move or to direct me to better place. We are not living in stable times. This is not a novelty — but I fear the scale of coming collapse and its potential depths are beyond any past experience of Humankind. The curse of old age is knowing you cannot alone do what must be done and so far you stand alone facing — too little time, too little energy, and too much to be done.
“I am trying to find some place and way of life to survive the coming collapse. I am making efforts to convince my children to follow to where I move or to direct me to better place. We are not living in stable times.
that’s all i’m after…to protect my little place in the wilderness, so my boys(and my nieces) have a place to come home to when it goes to hell.
i get in trouble with my parents and the school councilors(now that’s a rosy bunch!) for attempting to thread the needle between my honest assessment of what the future holds, and maintaining some modicum of hope for that future in my boys…it’s hard! the thread doesn’t fit into the little hole any more.
when just about every datapoint i can find points to doom and collapse, yet the official narrative says “everything’s fine”, what am i supposed to do?
it’s my job to prepare these kids for reality, after all…and yet i am not allowed to “be negative”,lol.
Except with as much wealth as the US has, there’s no legitimate reason that the children of BB’s should have to live less well than their parents – not that the current lifestyle of BB’s is living well, by any stretch of the imagination.
As for wants vs needs, before A/C was invented, everyone (duh!) went without it, even in the deep, hot, humid South. So what you might well consider a necessity now, people then would consider a luxury, though a very desirable one.
So no more victim blaming, especially from BB’s, please.
By the way, the concept of good and bad generations* is a Biblical theme and I’d say the jury is still out on the BB’s AT BEST.
*There are exceptions, of course, and I hope I am one (a boomer myself).
As the population of Boomers increases
er… um… the population of Boomers – as defined by the post WWII age demographic – can never increase (people aren’t still being born in 1959 or 1962 unless there’s a time machine I don’t know about.); the population of Boomers can only decrease.
If the term Boomers is referring to an economic upper middle class, yes, that can increase in numbers, but using the term ‘Boomers’ for and economic class is misleading, imo.
the population of Boomers can only decrease. flora
Good point and one I missed in anger, i.e. being weak is not the same as being contemptible – unless all babies are contemptible too.
If the term Boomers is referring to an economic upper middle class, yes, that can increase in numbers, ibid
Or they may decrease in the next bust and should if they oppose genuine reform, i.e. live by an unjust economic system, die by it.
Wolf mentions two possible culprits for rising consumer loan delinquencies which are exploitative lenders, and living expenses that grow much faster than some peoples incomes. I wonder if a third culprit might be the regularly growing outstanding principal balance of some existing consumer loans. What I mean by this is negative amortization which increases a loans outstanding balance by rolling unpaid interest into it, and negative equity which increases a loans principle by rolling a previous loans unpaid balance into it. Negative and near zero amortization is causing problems with big ticket student loans, which according to Bloomberg:
“though they’re meeting their $1,300 in required monthly payments, their balance has remained roughly the same over the last year because Vicky’s outlay doesn’t cover all of the interest on her loans. For all their education and career success, the Wilsons can’t envision repaying their school debts—ever. And forget about buying a home or opening a college fund for their 3-year-old son. “We don’t even think about it,” Jon says”
Negative equity is causing similar problems with auto loans, which according to the WSJ:
“Consumers, salespeople and lenders are treating cars a lot like houses during the last financial crisis: by piling on debt to such a degree that it often exceeds the car’s value. This phenomenon—referred to as negative equity, or being underwater—can leave car owners trapped.Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago”
Increasing a loans principle in these ways will increase the outstanding balance upon which a borrowers interest and monthly loan payments are calculated, and it can extend a loans maturity out indefinitely. I would be interested to know how many newly delinquent borrowers have large outstanding loan balances in these principal accumulating categories.
Can anyone explain the (ulterior) motive of banks who have been luring people into opening a checking and savings account at their bank by offering $300 or more? usually they want an automatic deposit into the checking account and make people keep the account active for at least 6 monhts.
That sounds like a cash flow problem. Sales typically move out old inventory or increase cash flow.
Could you expand on your answer? It looks to me like they want to increase demand deposits but it looks to me like a losing proposition unless (1) the Fed accomodates them for this or (2) they intend to impose service charge that will make up for doling out the $. BTW, many of them require a minimum deposit of $600.
Positive Interest On Reserves (PIOR).
In others words, transfers from other banks, currency deposits, direct deposits from the US Treasury, etc. increase a bank’s reserves and thus the PIOR they collect from the Fed.
Got it now. Especially since the shysters pay no interest (or close to zero) to the Fed.
Banks don’t pay ANYTHING for the inherently risk-free storage of their fiat at the Fed – instead the Fed pays the banks (PIOR)!
It’s a disgrace since, quite arguably, ONLY individual citizens and then only up to a reasonable account limit, have an inherent right to store their Nation’s fiat FOR FREE – others, including banks, should pay for that storage. But the banks ARE PAID (PIOR) to store their fiat at the Fed – the exact reverse of what is proper!
Thanks, good to know. I struggle to read all of the comments on NC, but it always pays off.
Consumer Deposits are held as liabilities on a bank’s balance sheet but the bank can lend by x times this deposit (depending on the stickiness of it – x is smaller if the deposit is a sight deposit and bigger if it is a term deposit).
So the banks get greedy/ desperate for deposits at two points in the cycle. At the bottom of the lending cycle and at the top. At the bottom of the cycle, delinquencies are stable or dropping But regulations are still strict and the equity base is small because of past write-offs. That means the x in the leverage calculation that allows banks to lend a set multiple of deposits is low, yet demand for loans is rising.
At the top of an extreme cycle, delinquencies are rising and the x leverage allowed is high but won’t go higher. Now banks are fighting to avoid recapping the balance sheet (adding equity) but loan write offs are being deducted from equity and some banks won’t be able to meet minimum cushion (capitalization) requirements. They need fixed term deposits to plump the cushion.
Obviously I used the top of an extreme cycle to illustrate but the deposit need is highest at turning points. I leave it to You to decide where we are.
I don’t know if this is relevant, but many people I talk to, especially younger people, believe that some kind of major collapse is coming. It is not hard to see that current arrangements are profoundly unstable and that much that is said about them, to put it in the most polite way possible, are misguided, if not entirely fictional. That being the case, those without stuff or backup might as well borrow and live as well as possible for the short time available to them before things get really difficult. If indeed (as noted above about poor people’s cars) they have any choice.
They are right, the collapse is going to be the Great Tribulation and complete destruction of this wicked worldwide system with Gods Kingdom taking rulership to time indefinite. Its at our doorstep and this system is going to continue to decay and fall apart, its not going to get any better.
Excluding the possibility of repentance is not Biblical at all.
E.g. when Jonah said “Yet 40 days and Nineveh is destroyed” was Jonah counseling the Ninevites to despair or to repent? Or was Jonah a false prophet when the Ninevites DID repent and Nineveh was spared for an entire generation (120 years)?
So whoever you Biblical authority is, drop him or her like a hot potato and read Scripture yourself, is my earnest advice.
I would warn the young who believe a collapse will cancel their debts — they are playing a bear market when predicting its end has ruined many an otherwise prudent investor. Better they avoid debts as best they can — rather than embrace them in any way. I too believe a major collapse is coming. I’ve forgone many years of potential gains because of that belief. The collapse is still coming. Instead of embracing debt it were much better to avoid it and thereby avoid being in a position where one could not survive the collapse. Timing a collapse is at best a tricky business.
I share this belief of younger people that some kind of major collapse is coming and I find myself increasingly occupied/transfixed by investigations for how me and mine might survive the collapse.
the grapes of wrath
I don’t see any real spike in delinquency rates, overall.
https://fred.stlouisfed.org/series/DRCCLACBS
It’s all at the low end – rising inequality.
I think you need to actually read the article. Wolf Richter is talking about subprime loans and the credit card delinquencies at smaller commercial banks – he excludes the top 100 banks – so not at all commercial banks like your graphic presents.
Maybe, but normally if the finance companies were rt of an OEM, they would be called captives.doesn’t me they aren’t, just odd if they are
Hedonic adjustments…very interesting. Are there any trued up CPI calcs that take true inflation into account? Why doesn’t the Fed reference those? I had two other related factors that came to mind for the deterioration of subprime credit this time around – ZIRP and low interest rates and 84 month auto loans have created the $70K pick-up truck, often driven around by people who earn that much in a year (or less)…driven by consumer greed and poor consumer finance education levels…and also the lower quality of consumer durables (HVACS and other major appliances)…I seem to be replacing my appliances twice as often now as I had earlier in my life…blame this on poor Chinese manufacturing quality or designed obsolescence or other…these unplanned big ticket purchases can blow up tight budgets quite easily.
Hedonic adjustments…very interesting. Are there any trued up CPI calcs that take true inflation into account? Why doesn’t the Fed reference those? Sancho Panza
Good question.
But regardless how price inflation is measured, it should be created* in an ethical manner.
*Yes, SOME** price inflation is good; otherwise lazy, risk-free fiat hoarding is rewarded as if that’s a reward for justice and progress.
** Since ZERO price inflation is too small (duh!) a target and we should err on the side of price inflation, not deflation.
correction: make that “as if that’s a recipe for justice and progress.”
“Are there any trued up CPI calcs that take true inflation into account?”
ShadowStats.
Delinquency Rate on Credit Card Loans, All Commercial Banks @ the Saint Louis Fed (FRED) shows to be 2.58% in the 3rd quarter 2019. How does that match up with 2.56% and 6.25%? Does anyone know where that 6.25% numbers comes from?
See above comment from The Historian. Averages conceal, as usual.
Good to check, though!
The plural of anecdotes is not data, but I have a couple of friends who have gotten themselves into 7 year new car loans because it was easier for them to figure out how to come up with the monthly payment than a sudden 1-2K repair bill on their existing car. Whether that bill was even ligit is a real question. The dealership that used to service my car gave me a bunch of bs about repairs that totaled up to about 6K when my car hit the 175k mark. I took it to another mechanic-the coop that Petal mentioned above. They charged me $500 for the one repair we both agreed was actually necessary. Just hit 240K on the car this week.
I have the luxury of being able to shop around for car advice, and I can afford a few hundred here or there to keep my existing ride on the road. My friends couldn’t take the time, and were afraid to spend the money on a different mechanic who might give them the same answer.
I’ve owned 2 new cars in my life and this will be the last. My present car owes me absolutely nothing, but the cost of a new car is insane, not to mention all of the do-dads they come with that I want no part of.
I view automobiles as one place a person of limited means can appear to demonstrate their affluence and wealth. The need to establish an invidious distinction seems to be an important part of our courting rituals. [In fact — I drive an old beater Corolla and feel reluctant — without reason perhaps — to attempt courting women … even ‘appropriately’ age-comparable women — since I am older myself.]
I should also mention a peculiar affection I feel toward old cars that have served me well — much like the ‘Martian’ and his affection for the vehicle that carried him to his launch point over many hundreds of kilometers on Mars. If I had a horse instead, I cannot imagine how difficult it would be and feel to put that horse to pasture … and I could never sell my horse to the knacker.
I’ve never cared about cars (trucks are a little more useful and therefor warrant a little more interest)…but don’t even THINK about taking away my 40-year-old bicycles! I do not give them names, but I do spend a lot of time with them*, and I cop to a certain affection for each one…
*I have all the old tools, and I have the time…
Jeremy, there are probably lots of fine women who admire thrifty men who can keep an old car going. My wife does, for instance.
The local Fox Sports AM radio station used to carry The Clark Howard Show, a right leaning consumer rights show. They canceled it of course. He used to have a segment where listeners would talk about their old cars with 2k plus miles. It’s a point of pride in fact. Like having a garden or going to thrift stores.
http://www.clarkhoward.com/
“200K plus miles”, I think you mean.
Also, don’t forget thrifty men who can do plumbing repairs, electrical work and carpentry, thus saving between $50 and $100+ per hour labor rates, depending on where they live.
I fell in love with and married a woman who got under her truck, in the rain, to hit the transmission linkage with a hammer to allow the jalopy to work. If she could handle that, the rest of life was a snap.
It would be interesting to have a COLA calculation that did not include the alleged “hedonic” adjustment. It’s more work than I care to do.
Are they struggling to make house payments because they live in an area where real estate is unaffordable? Or are they just buying nicer homes than they needed? Did they buy a Sonata and a CRV or did they get a Lexus and a Range Rover? To some degree, if you’re making $200k and you’re spending every dime you make, you might be doing it wrong.
I’m not some hard-hearted conservative. Any family of 4 making less than $100k per year, I could easily see struggling. And I guess if you live in a coastal city or maybe Chicago or Maryland, $200k probably doesn’t go as far as it would in flyover country.
Could someone please explain one thing to me? IIRC, back in 2009, I read that we had enough extra homes in this country to house everyone in the UK. Today, prices in my area (midwest) are going through the roof. Is that happening everywhere? How or why? Population isn’t growing that fast is it?
Around here, also in the Midwest in a fairly large metro area, prices are indeed rising at a good clip without a lot of population growth. It seems to be because much of the housing stock is simply not in areas seen as desirable to most people in the top 30% or so of income. So they are bidding up a much smaller pool of available properties than you might expect. And because the top 10% have bid up prices so high in the most prestigious areas, younger folk, desperate for houses they can afford, migrate to older neighborhoods adjacent to the more expensive ones, but where they either have to spend a lot on rehab or buy from a flipper. So now the newly cool neighborhood has greatly increased prices. Meanwhile, in huge swaths of the city most of the transactions are between owners of rental property at very low prices.
Not the general answer, but… real estate is generally shielded from money laundering scrutiny. So, the super-rich all over the world want something to buy, and they buy out the super-premium sector. This forces the local super-premium buyers down into the premium market, which pushes premium buyers to mid-market…
This has been a factor in the famous big cities. Don’t know about your area.
“The delinquency rate on credit-card loan balances at the nearly 5,000 smaller commercial banks in the United States…”
How much of that debt is actually owned by, owed to, those banks, versus Visa or Mastercard?
Are the credit card companies just servicers, collecting a fee or percentage, or, do they actually carry some of, or all the credit in some cases?
IOW, if one defaults on their credit card debt, does Visa eat it, or a bank?
“But cars … have gotten a lot better too, and these quality improvements are added to the price. Think of the move over the years from a four-speed automatic transmission to an eight-speed automatic, or from two airbags to 10 airbags”
You shouldn’t need to pay for all these improvements. In Canada Nissan sells a Micra for CAD$10,488 (US$7900). Automatic transmission, air conditioning and cruise are only available in a bundle for CAD$4000 more. The average price of a new vehicle in Canada is CAD$37,577.
The cheapest US car is the Nissan Versa, US$13,255.
> . . . Think of the move over the years from a four-speed automatic transmission to an eight-speed automatic,
It is a delusion to call that an improvement. The four speed automatic will last several times longer than an eight speed and be 1/4 the price of the eight speed to fix when it does break. Thousands and thousands of extra dollars in repair bills versus a hundred or so of extra gas over the same time frame is the tradeoff.
By the way, the Micra or Versa with an automatic are junk. No one should even contemplate getting one, even if they were being given away.
Sounds like end stage business cycle. S&L crisis in nonbank lending.