Household Debt Can Hasten Recovery, When It Goes Unpaid The gloomy forecasts, though, miss an important point: Debts have value only to the extent that they are being paid, and a rapidly rising number of U.S. households aren't doing so. Those defaults are leading to losses at banks, a wave of foreclosures, trouble for neighborhoods and strife for families. But they are also providing an immediate, albeit radical, form of debt relief. "It's not ideal, because it carries other costs," said Karen Dynan, a consumer-finance specialist at the liberal Brookings Institution think tank who recently served as a senior adviser to the Federal Reserve. But it is "going to help get household balance sheets back to the right place." If one accounts for defaults, U.S. households' debt burden is shrinking a lot faster than the official data suggest. First American CoreLogic, which tracks the performance of mortgage loans, estimates that some 9.3% of the nation's 52.4 million mortgage holders were 60 or more days behind on their payments as of July. That represents relief on about $1.2 trillion in loans. The official data miss most of that, because the Fed doesn't erase debts until banks have foreclosed, sold the homes and taken the loans off their books, a process that can drag out for more than a year. As a result, some economists are expecting a sharp improvement as widely watched indicators of consumers' finances catch up to reality. Joseph Carson, director of global economic research at AllianceBernstein, expects the share of households' after-tax income that goes to pay loans, rent and other financial obligations to fall to 16.3% by the middle of next year, well below the average for the 20-year period leading up to the housing boom. As of June, it stood at 18.1%. "It's part of the cleansing process of a downturn," he said. "And it's happening a lot faster than people realize."
The gloomy forecasts, though, miss an important point: Debts have value only to the extent that they are being paid, and a rapidly rising number of U.S. households aren't doing so. Those defaults are leading to losses at banks, a wave of foreclosures, trouble for neighborhoods and strife for families. But they are also providing an immediate, albeit radical, form of debt relief.
"It's not ideal, because it carries other costs," said Karen Dynan, a consumer-finance specialist at the liberal Brookings Institution think tank who recently served as a senior adviser to the Federal Reserve. But it is "going to help get household balance sheets back to the right place."
If one accounts for defaults, U.S. households' debt burden is shrinking a lot faster than the official data suggest. First American CoreLogic, which tracks the performance of mortgage loans, estimates that some 9.3% of the nation's 52.4 million mortgage holders were 60 or more days behind on their payments as of July. That represents relief on about $1.2 trillion in loans. The official data miss most of that, because the Fed doesn't erase debts until banks have foreclosed, sold the homes and taken the loans off their books, a process that can drag out for more than a year.
As a result, some economists are expecting a sharp improvement as widely watched indicators of consumers' finances catch up to reality. Joseph Carson, director of global economic research at AllianceBernstein, expects the share of households' after-tax income that goes to pay loans, rent and other financial obligations to fall to 16.3% by the middle of next year, well below the average for the 20-year period leading up to the housing boom. As of June, it stood at 18.1%.
"It's part of the cleansing process of a downturn," he said. "And it's happening a lot faster than people realize."
Instead of recognizing and writing down bad debt in an orderly and customary manner the US Government has guaranteed it, colluded in hiding the extent of it, and swapped trash for cash with selected TBTF banks under repo agreements while driving interest rates to zero so as to facilitate a generous spread for the favored banks and green-lighting accelerated gouging of customers with fees and increased rates in the guise of financial reform.
But the debt must be dealt with in order for recovery to be possible. Given the stunning indifference of the Obama Administration to the effects of its actions on the average taxpayer, why should the average citizen continue to play the game by rules that are increasingly seen to be massively rigged in the favor of a few banks. It increasingly looks as though unsustainable debt will have to be eliminated by individual debtors. The sooner the better, IMO.
A debtors revolt, even should it crash the entire existing world economy, could at least force the bad debt to be recognized and written down. It seems to me that such an outcome offers hope for a better future than is offered by current US policies. But it need not come to that.
Policies that are directed to saving the economy rather than selected banks could do an even better job of resolving the current crisis. The US Government has extraordinary powers to deal with the economy in situations of crisis and danger. It needs to use them.
We are held hostage by TBTF banks that are too complex to regulate, too difficult for government regulators to resolve and too powerful for government officials to oppose. But were the government, in a crisis, to use its extraordinary powers to put liens and freezes on the assets of the executives and boards of directors of these institutions, allowing them access only to a few tens of thousands per month for living expenses, it would be possible to provide incentive to those who run these institutions to wind down and resolve the interlocking obligations at minimum cost so as to retain the maximum possible portion of their wealth.
Why should we allow "Hostage" to be a game played only BY the banksters? The point of this comment is to show that there ARE alternatives and that this is a crisis of power as much as of finance. When the banks have bought the organs of political power it is rather lame to assert that economics and politics are two separate realms. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
And the EU seems to be far less owned by the banks than the former US government. There are signs here that the tiniest beginnings of attempts to corral and reform the banking system are already underway. Executive pay is merely a hot-button issue for the public, but oversight on derivatives and capital holdings, for example, are already underway.
Add to this that the European population, as well as the financial culture, has an entirely different view of personal debt as in amurka, and one sees that conditions here are different. Thus the beginnings of an attempt to reign in the financial industry.
For example, while many Europeans, particularly in Germany, have credit cards, the monthly balance is often taken directly from your bank account. The bank account itself may indeed have credit attached, but the standards are higher.
(Of course, one can get credit cards which allow accruing balances as well, but they're far harder for normal people than in the US. And credit cards are in far less use for daily activity, many stores and restaurants not even accepting them. Debit cards are far more widespread.)
Thus there is pressure for reform of amurka coming from without. (I'm ignoring the UK here.) And we haven't even begun to discuss the effect of BRIC action.
Though i doubt anything could stop the amurkan Untergang. "Life shrinks or expands in proportion to one's courage." - Anaïs Nin
Thus there is pressure for reform of amurka coming from without.
