“Where’s My Bailout?” Right after the great Rick Santelli rant, that slogan had its day in the sun. It was a T-shirt, a bumper sticker, a protest sign, and a really bad song. Where’s your bailout, Joe Average? Funny you should ask.
The public debt of the United States is a terrifying hogzilla of a beast, but the household-debt situation is a big fat ugly ogre, too. The household debt of the United States went from about 30-odd percent of GDP in the post-war era, climbed up to about 50 percent by the 1960s, and held steady until the late 1980s — at which point, the graph looks like a rocket liftoff. U.S. household debt was 100 percent of GDP by 2007, a level it had not hit since 1929, a coincidence that makes financial types faint in their Froot Loops. There’s been some superficially good news on that front: Just like the Wall Street bankers, Americans huddled around the ol’ kitchen table are doing a little financial deleveraging, paring down their mortgages and credit-card debts. Yay, Americans! The down side is that they’re mostly doing it through defaulting on their mortgages and credit cards, rather than paying them off. Boo, Americans!
Here’s the deal: Since 2008, Americans have reduced their total household debt by $372 billion. Banks have written off about $210 billion in defaulted mortgages, delinquent credit-card debt, and other uncollectable loans. But, as the Wall Street Journal points out, that $210 billion doesn’t tell the whole story: Just like mortgages, a lot of credit-card loans and other forms of consumer debt are securitized and sold to investors, and those losses wouldn’t show up on the banks’ write-offs. The Journal’s conservative estimate is that the real losses from charge-offs are about twice what the banks themselves have reported, a total of $420 billion or so. And it could be a lot more than that.
So how can we have $420 billion in household debt written off but only see a $372 billion reduction in household debt? Apparently, somebody’s still burning up the MasterCard. The only way to account for the numbers is that Americans are still borrowing at a pretty steady clip, a fact that is obscured in the data by the fact that so many of them are defaulting on their mortgages and credit cards.
The credit-card scene is getting worse. Earlier this month, Fitch reported that the charge-off rate for credit cards (which is to say, the portion of delinquent loans they abandon as unrecoverable) climbed to 11.1 percent from 10.9 percent in April. It’s been above 10 percent for more than a year now. The credit-card companies are pretty robust, and their business models assume a pretty high rate of default, one that is much more realistic than, say, what the mortgage banks assumed. (It would almost have to be, no?) But still, there’s about $1 trillion in credit-card debt in the United States, much of it packaged into securities, much as mortgages have been. Nobody wants to see another bond-market meltdown. And that’s why you’re getting a bailout in the form of an interest-rate subsidy.
In spite of the build-up of household debt, Americans are spending less of their paychecks on the mortgage and credit-card bills, currently laying out 12.46 percent of income, down from 13.96 percent in 2007. How is that possible? In short, it’s because the Federal Reserve is keeping interest rates at basically zero, which eases the pressure on mortgages, credit-card interest, and other consumer-debt burdens. That’s your bailout, Mr. American Consumer: Little old ladies who put their money into Treasuries and good old-fashioned savings accounts are getting a return of +/- squat, approximately, partly to subsidize the wicked ways of spendthrift mortgage borrowers and credit-card junkies. Borrowers get bailed out, savers get hosed. It won’t last. In spite of the rather expansive fiscal attitude of the Obama administration and its allies in Congress, there hasn’t been much sign of consumer-price inflation, so the Fed is under pressure to keep interest rates at approximately zilch. But those rates aren’t going to stay low forever — nor should they.
The Fed’s cheap-money policy during the real-estate-boom years was a major contributor to the bubble, and repeating that policy now simply lays the groundwork for another bubble. But when interest rates start going up, it’s reasonable to assume that defaults on mortgages and credit cards are going to go up, too. Those defaults are going to go careering through the markets like Artie Lange in a co-starring role with Jack Daniels — which is to say, it’s going to be a lot of fun to watch for those who don’t get run over. Until then, enjoy your cheap money.