Consumer Debt, Not Housing Bubble, May Be Root Of Economic Woes

[SoCalDem]

THIS IS WHY THE RUSH TO BAIL OUT WALL STREET... This monster's coming 'round the bend..heading straight at us:(

.......................................................................

Too much revolving debt makes recovery more difficult

http://www.consumeraffairs.com/news04/2008/04/bubble_credit.html



By Mark Huffman
ConsumerAffairs.com

April 1, 2008


The U.S. economy is in the midst of a credit crunch and more and more economists are tracing its origins not to the housing meltdown, but to the credit card. Steven Fazzari, economics professor at Washington University in St. Louis, says rising consumer indebtedness is finally slamming the brakes on the economy.

"For more than two decades we had consumer-led growth, which actually mitigated the recessions of the early 1990s and 2001," Fazzari said. "Part of the reason we had mild recessions was due to consumer strength. But we kept building up debt. "It was also a period of falling nominal interest rates. This meant that every cycle of low interest rates was another opportunity for people to refinance on better terms and extend their spending further," he said.

In simple terms, consumers are now just tapped out.

According to the latest Federal Reserve Consumer Credit report, total revolving debt by consumers, which consists primarily of credit cards, is at an all-time high of $947.4 billion. "Americans are in more debt than ever before," said Brad Stroh, co-CEO and co-founder of Bills.com, an online personal finance Web site. "The credit card industry could be the next domino to fall if consumers don't get a handle on their personal finances soon."
Fundamental changes

snip....

With property values plummeting nationwide, homeowners no longer have the luxury of tapping into home equity lines of credit. Instead, many have to use high-interest credit cards and other revolving credit for short-term cash. This trend also concerns Stroh, who warns that individuals facing economic hardship should be managing and eliminating debt, not adding to it.

snip...

A credit card industry meltdown would have serious effects on the broader economy and create hardship for banks and consumers alike, according to Stroh.

snip....

[mrJJ]

1. Mortgage Debt not included

There is $596 trillion in derivatives debt (Thank You, Sen Gramm), over $2.5 trillion in credit card debt, and $58 trillion in credit default swaps

http://www.wallstreetdigest.com/hotline.php

[SoCalDem]

6. $2 trillion figure represents a doubling of America's consumer debt in less than 10 years.

as of 2004..

http://www.msnbc.msn.com/Default.aspx?id=3939463

Consumer debt grows at alarming pace
Debt burden will intensify when interest rates rise
The Washington Post

By William Branigin
updated 3:09 p.m. PT, Mon., Jan. 12, 2004

snip

According to the latest figures from the Federal Reserve, America's consumer debt has topped $2 trillion for the first time, continuing what debt experts view as an alarming surge in recent years. To some, the nation's consumer debt, which dwarfs that of any other country, represents the kind of "bubble" that the stock market grew into during the 1990s. "It's a huge problem," warns Howard S. Dvorkin, president and founder of Consolidated Credit Counseling Services Inc., a nonprofit debt-management organization. "You cannot be the wealthiest country in the world and have all your countrymen be up to their neck in debt."

snip

"That's one of the trends that's really going to kill the American consumer in the next downturn," he says. "It's just impossible to keep these interest rates this low for much longer."

snip

But the overall problem may be worse than the latest record debt level indicates, said Manning, author of the book, "Credit Card Nation: The Consequences of America's Addiction to Credit." He traces the problem to a credit economy in which credit cards have become "yuppie food stamps," akin to a "social-class entitlement" rather than an earned privilege. Now, government figures show that three out of five U.S. families have credit card debt.

snip....

[kenny blankenship]

31. Hey America, you don't need a raise or, God forbid, a union -

You just need a higher debt ceiling on your credit cards!
Go shopping America, stretch out your payments. Roll all your debts into one monthly payment. All will be well.

That's what they did to the American worker - extended them credit in lieu of wages keeping pace with inflation. It's mind boggling that they could get away with it for 5 years let alone 30 or 40.

[BelgianMadCow]

10. Interesting numbers there. Brings perspective, thanks

Although I'm afraid I can't really grasp what 600 trillion in derivative debt means... :shrug:

[texastoast]

2. But paying as you go fixes it

Don't spend money you don't have. Save then spend. Instant gratification will bite your ass in this case.

Paying as you go needs to start from the bottom up.

Being in debt was at one time very shameful in our culture. It should have stayed that way.

[lunatica]

42. that means no one can go to college

Or buy the car that gets one to the job one has. Without debt there would be no doctors since no one can possibly save that kind of money for medical school or any other kind of professional job that requires a college education. It's not always about greed and instant gratification. It probably isn't about that in most cases. Children need school supplies and clothes, and the basic bills like rising energy costs and large mortgages, or outrageous rents, and just simple food keeps going up. If your refrigerator wears out how many people can wait to save $1,000 plus to replace it? Especially if one gets a flat tire and has to buy a new tire at $100 plus a pop? Just maintaining a car can run one into a serious debt that one's salary simply can't catch up to.

Things are not that simple

[SoCalDem]

43. They USED to be.. That's the point.. Credit cards have only masked the outrageous run-up

When people can no longer pay, prices will come down.. There will be an equilibrium, if we seek it and insist on it..

Even now , what good is spending $50K of debt on a degree that , for many people, gets you little or no real return on the money..

What good is a $40K job, if you have $50K of debt, just as you enter your adult life?? You would be better off with NO debt, and a $25K job..

[texastoast]

48. Yes, they are

You spend less. And save more. It's what Americans did before the idea of credit cards came along.

You don't have to have a new car. I'm driving one that is 13 years old that I paid $3,000 for three years ago. Don't buy a car for which you have to have a car payment.

If you want to go to medical school, you better make good grades in high school chemistry and work. Lots of schools give scholarships.

Don't have babies until you can afford them. Plan on about $175,000 each for food, shelter and clothing. Dance lessons in addition.

If you don't have the money, don't buy it.

And plan for disasters and planned obsolescence. It's just how life works. And the problem is a whole lot about instant gratification and having no foresight.

[SoCalDem]

49. And eventually schools will have to start charging less, as students

figure out their scam.. Schools are using less and less of their "endowment" funds for students..People leave money to the schools FOR students, and the schools just haord them in a big game of "my endowment is bigger than YOUR endowment".. There's a recent study (saw the lady on cspan) that's starting to shed some light on this situation..and they are trying to open this whole thing up for some investigation.. Many of these schools get federal aid, claiming they "need" the help, while they sit on shitloads of endowment money they're too tight to spend ..

[FreakinDJ]

3. American public NOT being told the Truth

is all I can see and if we want Obama in office the DEMs had better get on the Defense of the issue

[TechBear_Seattle]

4. The mortgage meltdown is a subset of consumer debt

The people who got the subprime mortgages were people who either had too much debt already or whose credit was not good enough to qualify for a normal mortgage.

[Selatius]

5. It's the high interest rates that are killing folks. I lay the blame on states like Delaware.

In Delaware and South Dakota, the cap on interest rates is either non-existent or extremely high as to be nothing short of absurd. The state legislatures in these two states knew what they were doing.

As a result, credit card companies relocated to these two states because they know they can charge 25 percent interest, and the Supreme Court declared that these credit card companies are governed by the interest rate caps in the state in which they reside, not the state in which their credit card customers reside.

[SoCalDem]

7. Utah & Nevada do it too..

:(

[enid602]

8. buckle your seat belt

And to make it worse, many other countries (e.g., UK, Spain) have even higher per capita indebtedness than we.

[Warpy]

9. Look behind all that debt to find out what caused it!

WAGES HAVE NOT KEPT PACE WITH INFLATION

That is the root cause of every single problem we're facing, from needing to buy cars and educations on credit to being bankrupted by medical costs even if we have insurance to defaulting on our mortgages.

[BelgianMadCow]

12. Obama touched that nicely yesterday - the crisis was among us well before this $ crisis

This has been my biggest frustration - we are supposed to have an index here, but it NOWHERE measured up to the actual increase in price.
In other words, there has been staggering, un(der)reported inflation.

It is not just since the last weeks that the national banks have been injecting hunderds of billions into the markets.

[SoCalDem]

14. Busted unions = low wages/no pensions = plastic cards

not a "fair" trade, was it? :cry:

[BelgianMadCow]

22. Only a worldwide union of workers COULD stand a chance against the Predators

can't allow that to happen, can we?

The only reason we in Europe haven't lost all of our social securities, is precisely the power of the unions - which stays strong, even today. Look what truckers in France can do...who will organise these things if not unions?

[Mari333]

20. amen and you said it. n/t

[Irish Girl]

28. Warpy

I agree with you but take it a step further. What causes inflation? Who does it benefit and who does it hurt?

Once Americans start asking the right questions, we'll be on our way to healing financially.

[Warpy]

34. The inflation that caused the most damage was in the 70s

and that was directly attributable to the OPEC oil shocks.

Unfortunately, in their infinite wisdom, economists blamed workers for having too much money that was chasing too few goods and that gave our elected and corporate pricks all the reason they needed to hold wages down, starting with the minimum wage.

Energy is also driving the massive inflation now, but the cause is bad fiscal policy driving the value of the dollar down. Undoubtedly, they'll try to blame our overly high wages again, but I doubt it will play in Peoria this time around.

[AdHocSolver]

51. The PRIMARY cause of inflation is the offshoring of jobs.

The offshoring of jobs means that the U.S. has a huge trade deficit. This country does not earn enough money from selling goods to other countries to cover purchases made from foreign countries, so it has to pay for goods with a "credit card".

This huge debt to foreign countries is devaluing the dollar and is a primary cause of inflation. Just as there are no comparably valued assets backing subprime mortgages, there are no assets of value supporting this country's debt. What the corporate insiders were doing to get the foreign countries to keep lending us credit, was to sell them U.S. assets, that is, sell them the American corporations under their control. Another way to keep this system going, was to induce foreign countries to keep buying U.S. government securities.

However, the loss of jobs in the U.S. means that there are fewer people paying income taxes so the U.S government is going to have a harder time paying off its debts when they come due, without borrowing more money. This means more risk to foreign creditors and so they are demanding more dollars for the goods we buy from them.

However, the manure is about to hit the fan blades. The deeper in debt Americans go, the less goods they can buy, so the American companies that foreigners bought will earn less profit. They start laying off workers as business declines so income tax revenue drops meaning the federal government securities become less attractive and their price drops (meaning interest rate rises. Borrowing becomes more expensive and we get more inflation.

Then add to these basic problems with a trade deficit, federal deficit, and increasing unemployment, the swindles perpetrated by the banks and other financial institutions (including this new swindle of demanding a $700 billion bailout) and this economy is going into a severe recession, if not depression, no matter what is done. By the way, the proposed bailout will not only not delay or prevent a serious economic problem, if it goes through, it will HASTEN an economic collapse.

In fact, the bailout is SUPPOSED TO bring on a collapse. The purpose of a collapse is to wipe out all of this debt. The insiders will still CONTROL the assets of the corporations. However, they won't owe any money to anyone. All of THEIR debts will be wiped out. A bail out will just be a gift to the swindlers.

The way to bring prosperity to America, the ONLY way, is to get rid of NAFTA, the WTO, the IMF, the World Bank, and reorganize or abolish the Federal Reserve System as it is currently constituted. These institutions have nothing to do with "free trade". They are corporate cartel agreements designed to stifle competition and "free trade".

The purpose of doing this is to make it profitable to bring jobs back to America. These cartel agreements together with the tax code, which also needs rewriting, make it profitable to export jobs. Import quotas and import duties need to be imposed on foreign goods to level the playing field. Another reason companies exported jobs is to gut the unions. If you don't have a job, your union can't do much for you.

More American jobs means less goods that need to be imported, which means less foreign debt, which means a stronger dollar, which means less inflation.

This means reinstituting government regulation of corporations by people who are competent and believe in regulation.

Note: This proposed bailout is a scare tactic to swindle more of our tax dollars. Paulson just pulled a large number out of his hat. Any company asking for taxpayer dollars should first submit to a thorough government audit of their books. In fact, this giveaway could hasten a meltdown of an already shaky economy. Asking taxpayers to take on more debt is like throwing gasoline on a fire to put it out. Even superficially, it sounds stupid.

To help our current economic situation, notify your representives and Senators: NO government giveaway with this bailout scheme.

[madrchsod]

11. i know three people who live off of their credit cards

each one is in over 20,000 and make minimum payments. they will be in debt to the credit card companies until they day they die.

at least that`s one thing about having a crappy credit score...no credit cards. we have to live with in our means.

[adarling]

13. no shit

i am guilty of it, everyone is guilty of it...living outside your means...but to live in this world, you must live outside it sometimes. I use my card on basics, change of tires sometimes groceries...plane tickets and such, but its impossible not to use it today. I feel like i see cash fly right out the window.

[SoCalDem]

16. Remember when a "20" broken on Monday, would last the week?

I do..

Now a "50" won't cover dinner out..

Last Thurs we took our son & daughterinlaw to the Cheesecake factory..

hubby had fish & chips, I had a cuban sandwich, daughterinlaw had a chinese-y chicken dish & son had a chicken sandwich.. 3 iced teas (not the alcoholic kind) and 1 water.. 2 small dinner salads... total with tip $89.37...no appetizer not even any cheesecake:( (we were all too full)

[adarling]

50. thats the one good thing about cheesecake factory

you spend alot but you at least have a ton of leftovers for lunch or dinner or both the next day. but i do remember you could at least go to a place and spend enough but not too much to leave you in the poor house. everything is going down hill, but it is kinda nice, seems everyone is in the same position now.

[lligrd]

15. So "Go Shopping" Was Bad Advice?

Go figure.

[Cresent City Kid]

17. We were told to shop in response to terrorist attacks

Our economy is heavily based on housing and consumer spending. That comes down to spending our paychecks which have stagnated if you're not in the top 1%. When that ran out, we charged it. Now, there's no more blood in the turnip. The only money left in our country sits in the bank accounts of under-taxed wealthy people. Screw trickle-down theory, it's time for pinata theory.

[Waiting For Everyman]

18. We need FDR - to declare this paper worthless, and start over.

There are not enough assets to back up these trillions in paper. THAT's the bubble. Not credit cards, but derivatives. And it isn't the debt we have, so much as the credit TERMS.

Money costs almost zero. So how in the hell can 20% interest rates be justified? That in itself is massive theft, and redistribution of wealth... all to pay off funny money.

We'll have to stop this madness sometime, there's no other way to deal with it ultimately, so it may as well be now.

[SoCalDem]

21. The whole "system" needs a big ole laxative.. flush all the shit out

and start over..

Let the chips fall where they may.. I'll lose money, you'll lose money, we'll ALL lose money, but we owe it to our grandchildren to set this right.. and I don't even HAVE grandchildren yet :)

We need to look back to "when it all worked", and then emulate it.. Sorry rich dudes & dudettes.. that means y'all have to start ponying up some serious tax money... and it means that credit will be once again only there for the really credit-worthy...not 18 yr olds with no jobs or 22 yr olds with 50K of college debt..or old people on SS with no money..

Belive me.. prices & costs will fall when REAL money is needed to buy or use them..

[eilen]

19. From ground zero of the economic meltdown

http://boards.fool.com/Message.asp?mid=27033376">No one here but us elves| (If the wrong post, click on full thread) From the Motley fool boards:

<start quote>
In answer to your questions, yes I was very intimately involved in the whole "Structured Credit" market. I was a salesman at a major international bank up until November of 2007 when it became apparent to management that they'd lost a ton of money with some bad positions (only hundreds of millions, but given we were pretty small in this area that was plenty!). They moved quickly by basically firing the lot of us, so that was fun. I was actually having my best year ever, double my previous best, so was a bit of a shocker to be out on my ear with no bonus when I'd been expecting a very chunky one.

I should stress that we weren't really involved in all the dodgy mortgage business that was going on, we were simply working with Corporate debt - i.e. bonds companies issue to fund their operations. People like GE, Ford, Caterpilllar, JP Morgan, and European and global companies as well. Our most lucrative product was called a Synthetic CDO (Collateralised Debt Obligation) which was manufactured using CDS (Credit Default Swaps). Sorry for all the TLAs (Three letter acronyms!).

You can skip this paragraph if you want, it's pretty complicated and not necessary, but I think it gives a flavour of some of the stuff that was going on...Basically we would set up a special company to sell protection on maybe 125 different company's debts and collect a premium for doing so. It then gets a bit complicated... Investors (pension funds, insurance companies - AIG was a big investor - and foreign banks) give you money, maybe a total of about a billion dollars. This money is used to buy a "safe" asset such as a bond made up of Credit Card receipts which is known as the Collateral. The collateral is put into the special purpose company you create and it then uses that as backing for selling protection on all the companies who's debt it's insuring. The income stream from that insurance goes back to the vehicle. Now, the investors have bought specific bits of the investment, depending on their risk tolerance/greed. Some buy the AAA pieces which are meant to be tremendously remote from risk of losing any money, but they only paid you Libor+20bps or so, so if Libor is around 3% you get 3.2% on your money. Others take the riskier parts depending on what they're looking for - the clever part is that unlike a "normal" CDO, with a synthetic one you don't need to sell the entire capital structure. You can construct it so that there are only AAA and A pieces, so if you can't find buyers of the rest, you don't need to cut the prices to shift them! It's amazingly complicated to explain how you do it, but trust me, you can.

Anyway, the fun part is that these were not, by any means, the most ridiculous bubble-type instruments. Oh no. For those the prize has to go to CPDO - which stands for Constant Proportion Debt Instruments, but you don't need to know that at all. Basically these are massively levered instruments which sell protection on an entire index of CDS. The Indices are extremely popular with investors looking to get exposure to a whole parcel of companies at once. They're very liquid and were being quoted at the time in 1bp markets (0.01%) on sizes of up to $1 billion a side. That's astonishing. Anyway, the CPDOs took on this risk, and borrowed a ton of money to do it. If the trade moved against them, then the CPDO simply doubled down. And again. And again. Eventually they were up to about 15x levered, so for every $10 million you invested, you would have risk of up to $150 million - luckily though you could only lose your initial investment. And they were rated AAA by both major rating agencies! And, when the synthetic CDOs were paying just Libor+20bps for AAA risk, you got Libor+200! That's a massive increase. So obviously, a lot of people bought these. And they all got basically none of their money back as the credit indices they were tracking widened out more than anyone believed was even close to possible. Ooops. Black Swan event! I'm proud to say that the Synthetic CDOs I sold are nowadays selling for about 40 cents on the dollar, so have outperformed :)

With regard to the mortgage market - we were at one point asked to sell bonds made up of so-called NINJA loans (No Income, No Job or Assets) or Liar Loans where the person getting the mortgage has not provided any evidence of their income. I am pleased to say that I actively advised my clients NOT to buy any of those, or the CPDOs even though I would have earned good commission from selling them. It was very very obvious to me, and I think even to some of the people who bought them, that these things were no good. So why, you ask, did they buy them? A few of the major reasons:
1) A pension fund or insurance company needs to generate a certain yield on their investments to survive and these products were the only ones in 2006/2007 that would give them the required yield. Probably a consequence of interest rates being too low for too long, and besides, all your competitors are buying this stuff, so you're not going to get fired for doing so as well.
2) House prices can never drop. And if house prices never drop, then it doesn't matter if the buyer defaults, because you get his house.
3) Company debt won't default any more - financial innovations and the surge of money from China and the middle east will allow everyone as much money as they will ever need. To be fair, corporate defaults were probably at their lowest level ever, but that was a result of all this money being unwisely thrown around, not the reason for it.
4) People didn't realise quite how low lending standards had become, for both companies and mortgages.

Ok, so, once things started to go south - and there's still discussion about what triggered it all, we'll likely never know, but I imagine it was when defaults started trending up sharply on mortgages, and home prices in certain hot areas started declining - then because of the massive leverage everyone had it all went bad very quickly. The end result of that of course, was me losing my job :)

I now have another one, but now I'm even more involved in the mess than before. I'm working for a smaller shop entirely on commission and it's far more exciting. I am now involved in the mortgage backed securities market, the Auction Rate market (that would be a whole other diatribe...) and the Loan market. CDOs of mortgages (normally called ABS CDOs, or RMBS CDOs) are now generally trading anywhere from $0 to $60 depending on how old they are (anything done in 2006 or 2007 is mostly worthless) and what they've got inside them. It's impossible to look at a company's disclosures of their mortgage assets and give an accurate value because you simply can't know what they own exactly - but I think it's fair to say that very few of them are marking their books at levels where they could actually sell those assets. That's one of the reasons there's so much fear in the market - no-one knows what exposure other people have, and often people aren't sure what exposure they themselves have, as a result, they're all trying to hold onto as much cash as possible in case they need it. That's caused the inter-bank markets to seize up - which is one of the things the Fed has been trying to control by injecting hundreds of billions into it on a regular basis. Sadly it's not really working, and things are as bad as, if not worse than they've been in living memory. If banks can't borrow from each other, then they don't have the easy access to funds which makes it safe for them to lend to consumers or businesses. If consumers and businesses can't borrow from the banks, then they not only can't expand, or hire more people, or buy a bigger house/car, but there's also a much bigger chance of them going bankrupt. If people can't re-finance their mortgage, or companies can't re-finance their debt, then they'll default on it. If that happens, generally the people who lent them money in the first place will take a loss. As a result, they'll have less money to lend to anyone else, and will raise their lending standards to even more impossible heights, causing more defaults, etc etc. It really is a vicious spiral.

So the question remains "Where now?". Both in the sense of where are we now? And where are we going now? I think we are not yet through this mess. Washington Mutual died last night, all the big investment banks have either died, been taken over, or become banks themselves, the world's biggest insurance company has died, I think Wachovia will likely disappear, and maybe Morgan Stanley. There's still a great deal of pain to come. I don't see any of the big financial companies making anything like the money they used to for the next few years (though it will come back eventually). The economy won't be in a good way any time soon. Second Quarter GDP was just revised down to 2.8% and frankly I don't believe that number at all. We're in a recession, and have been all year, and probably will be for another year. I am cutting back expenditure in my household significantly (no funky new small form factor PC for me....) and trying to preserve capital in the stock market. I think that I'm actually net short the market now, and have been for a while.


So where do we go from here? At some point things will turn around, but I don't think yet. I don't think people have marked down their books enough, I think a lot of companies have too many employees. I am convinced that a lot of local governments will be feeling very significant pain soon, and some of them will be going bankrupt. Property prices will continue to fall because it's very hard to get mortgages of any size at decent rates. Eventually though, things will return to normal, probably sooner than I think, because I'm a bit of a Bear by nature. At some point there's going to be the most tremendous money making opportunities as property and shares will both be cheap. Given ongoing earnings though I don't believe we're there yet.

In terms of anecdotes about my friends/colleagues - a lot of them still don't have jobs having lost them at the end of last year, or beginning of this one. Many are going back to school, I think there'll be a lot of new graduate in a couple of years with fresh MBAs! Those who are still employed, or like me who've found other jobs, are expecting incomes to be much lower this year. Very few people expect big bonuses this year unlike last, so spending all around is down and likely to stay that way. We all talk a lot about the market and what's happening, I'm normally the most pessimistic to be honest, but I've also been the one making money off my shorts this year :)

The bailout plan is both brilliant and terrible I think. It all depends on the execution and as always the devil is in the detail. If they buy the assets at current market levels then the taxpayer will probably make a profit (no guarantee though!) but the people they buy it off will probably go bankrupt. The problem with the banks right now is not that they can't sell these assets - it's that if they sell the assets where they are now they'll realise massive losses and probably some will go bankrupt because they don't have enough capital. In my mind, what's necessary is a massive injection of capital into the banks (taking big equity stakes obviously) and let them deal with the assets themselves, after all, they know them better than anyone. Once they have sufficient capital they'll be able to lend again and take realistic write-downs on their books. Unfortunately that doesn't seem to be the plan, and in the absence of any government plan then total panic will set in again in the market. I know that the week of LEH and AIG I was not the only one running around with their hair on fire, and the situation would be that bad again if people thought that no government action was coming, or worse, that government action was ineffective and they'd done everything they could.

So in conclusion, we need a bailout, not because its a good idea, but because it's the least bad idea we have. Not doing anything is a much worse idea - "sticking it to the bankers" although satisfying is pretty counterproductive. The bankers will be mildly inconvenienced, but Joe Sixpack in Oklahoma will lose his house and his pension....
<end quote>

[Waiting For Everyman]

24. Until this kind of "asset" is outlawed, nothing will get better.

The fastest way to turn the real economy around is for the government to fund real refinances and new mortgages to real people at minimum rates. We need to make old credit cards and consumer loans easy to rewrite or write off, and new credit harder to get - but at low rates within a tight usury range, and with some common sense laws about credit scores and bankruptcy. This consumer gouging has got to stop. People have to have a way to recover when severe hardship hits them. Next we need a $10-12 minimum wage with colas, and a limit on top salaries - the Japanese do that and it makes a lot of sense. (Why shouldn't it be something like 100 or 200 times the minimum wage, and the rest taxed out of existence? Nobody, I don't care who they are, is worth 100+ people. If the tops wants their income raised, that way, they'd have to raise the bottom too. We also need a global minimum wage, or get out of trade agreements.)

On the bank level, this absurd paper has to be declared void and never come back. No more gambling and speculating and shorting and insuring fictitious 'assets'. Investing is a different thing. We need a real banking system, based on real and stable assets, and not a bunch of cowboys making 100 times what they're worth for no reason except playing the system.

And pension fund holders and stock investors are going to have to go back to realizing that a 'killing' can't be made every day.

As SoCalDem (I think it was) said above... we need to go back to what worked, and do it again.

I'd like to think that Obama and the Dems will do that. But watching this bailout, I really have my doubts.

[SoCalDem]

25. and businesses need to stop counting "accounts receivable" as ASSETS

If you "loan" $5k @ 8% interest, to your junkie nephew, you know better than to call that "an asset" that's coming back to you.. Until it's IN your bank account, it's just money "owed" to you...with no assurance that you'll ever see it again..

[Captiosus]

30. Hallelujah!

I only had to take two basic finance and accounting classes at Strayer University and no one could explain to me in any of those classes how "accounts receivable" were an asset. I specifically asked how the possibility of receiving money on an account was the same as actually having the money or even tangible property with the same value as assets.

My genius professor's answer: "That's just how it works."

[SoCalDem]

35. My aunt had a clothing store and had very few charge accounts...why?

she explained it to me as a 12 yr old..
she said:

"I paid for that dress with MY money, out of MY account..I OWN it.. I "sold" it to Mrs "X" , but she charged it, so she HAS MY DRESS that I PAID for, and I have a PROMISE from her to pay me a little more than I paid for it.. That's MY profit..BUT since she did not give me cash, I have NOTHING..I don't have the dress I paid for, and I don't have the profit I would make from selling it.....until she pays me..and what do I have if she drops dead tonight?"...

[Waiting For Everyman]

26. It's absurd too for debts to be written off taxes as uncollectable, and then sold to be collected!

These 'creditors' are getting paid twice.

[SoCalDem]

36. and if a debt gets written off, the debtor technically owes TAXES on the written-off money..

I have hard of people getting ding-ed from the IRS when they short-sell a house..don't know if they actually have ended up having to pay it though,.. when you're that broke it's kind of hard to get money from people:(

[1776Forever]

23. Let's face it - With thousands of people without jobs & only mediocre jobs for them out there

what the H do these idiots think people are going to do? They are going to charge their gas, food, utilities etc. on their credit cards! It is only going to get worse no matter if we do or don't do anything for a few years!

[Captiosus]

27. 947.4 BILLION?!

Makes my measly $2,600 in revolving consumer credit debt look pansy.

Rounding up to 948 billion, this figure would mean every man, woman and child in the United States owes approximately $3,100.00 in revolving consumer debt. However, this number includes all residents and if we adjust it to just the population that is 18+, every adult in the U.S. owes approximately $4,300.00 in revolving consumer debt. That's just staggering.

[AlCzervik]

32. around $3,100 for every american.

[SoCalDem]

37. actually it's about $13,000..

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4106693

snip...

Although the credit card industry says average household consumer debt comes to $9,000, Manning said, it is actually closer to $13,000 when the roughly 40 percent of households that pay their balances each month are taken out of the equation.

"In the old days, the best customer was someone who could pay off their loan," said Manning, a professor at the Rochester Institute of Technology in Rochester, N.Y. "Today the best client of the banking industry is someone who will never pay off their loan," because then the client is more likely to incur fees. In 2002, the average household consumer debt translated into $1,700 a year in finance charges and fees, he said.

snip

[AlCzervik]

38. 947 billion divided 301,000,000 is around $3100, i went off your number in the op.

[SoCalDem]

39. the larger figure was arrived at by removing the "full-payment-every-month" folks

:)

Aren't numbers fun :)

[AlCzervik]

40. i'm one of those full payment folks, i almsot never use my credit card anymore from

totally fucking myself over and being strapped for almost 10 years. I was lucky i dug out, i know i was lucky, those with crushing cc debt, i totally feel for you.

[SoCalDem]

41. We did the same.. and totally LOVE having no debt..

I do use my Discover card (the only one we kept active) every so often to keep it current, in case we ever DID have a true emergency.. but we pay cash for everything.. even our last car.., and we have more money now than we ever did when we had "the cards"..and we want for nothing..

but to be fair..our kids are all grown and gone now, so we need less too:)

[Gormy Cuss]

47. It looks like you're quoting household debt & chimprsmarter computed per capita debt

Since IIRC average household size is around 2.6 people and the per capita rate would be similar using 9K figure. Hard to tell if the two computations had the same basis however.

[kenny blankenship]

29. Mortgage loans, auto loans, credit card debt...Let's just say we owe A LOT of people A LOT of money

[Junkdrawer]

33. "Student, car debt quietly added to bailout plan"...

In the dark of night over the weekend when most people were snoozing, the Treasury dramatically expanded its bailout plan to include buying student loans, car loans, credit card debt and any other "troubled" assets held by banks.

The changes, which were included in draft language that also opened the bailout program to foreign banks with extensive loan operations in the United States, potentially added tens of billions of dollars to the cost of the program.

Although it was a major addition to what was already the nation's largest-ever bailout, it did not become part of the debate between Democrats and the Treasury over details of the program. A Monday counterproposal by Senate Banking Committee Chairman Christopher J. Dodd included such consumer loans as well as mortgages, just as the Treasury's draft did Saturday night.

"The costs of the bailout will be significantly higher than originally considered or acknowledged," said Joshua Rosner, managing director of Graham Fisher & Co., who charged that the Treasury and Federal Reserve have not been "forthright" about the ultimate cost to the public. The plan gives Treasury the discretion to buy the non-mortgage loans and securities in consultation with the Fed.

...

http://www.washtimes.com/news/2008/sep/23/student-car-debt-quietly-added/

[sarcasmo]

44. Tell people to spend and then blame the consumer, priceless!

[VOX]

45. Use these convenience checks to buy that new car! Transfer your balances NOW to this LOW 18.9% loan!

"You won't be sorry you did! And hurry, this offer expires September 30!"

Credit card debt = indentured servitude. For decades now, banks and lending instutions have seduced, cajoled and hypnotized the average consumer that he/she NEEDS this car, or that vacation, or this house, or (insert your desired goods & services here) _______________________.

Each day, the mail carriers of America seem to deliver at least 2 or 3 promotional come-ons from various banks, all competing to create greater consumer debt. (Which, in "normal" times, is very lucrative for Wall Street and its numerous spin-offs.

The banks continually lure suckers on an hourly/daily basis with enticing imagery and media-prods, all in an attempt lure in Joe and Josephine Chump, who will be paying they $25,000 they took on their Bank of America home equity line of credit, to refurbish their house that's dropped so much in value that they're actually wasting $$$ by improving.

Using consumer-debt as the scapegoat smacks of blaming the victim. :grr"

[SoCalDem]

46. Not "using it"..just pointing out that this is the next big "bubble" that's just waiting to pop

but where will the money be to do another "bail-out"? It;s probably the "last" one to pop though, so maybe we need it sooner, rather than later..

Once we have hit bottom, we can at least evaluate what options are left, and start again..only smarter this time ..:)

[libodem]

52. No wonder tightening the bankruptcy laws

were one of the first betrayals of the American Democracy.

[El Pinko]

53. Gee, who could have predicted such a shocking turn of events?

Why, I would have assumed that impoverishing the majority for the benefit of the wealthy few, then driving the economy on the basis of massive consumer debt would have lead to permanent prosperity?

I'm agog.

[Hidden Stillness]

54. I Do Not Agree With This Whole Premise

I just do not agree with the premise of this whole OP/thread, and again on these DU threads lately, I am not an economist and do not know much about the way they have the deregulated speculative system set up, but it seems similar, many ways, to the 1929 Crash, and also I just do not think that the individual behavior of people buying things on credit--not a new system by any stretch--itself just "collapsed" for whatever reason; I think it could only have been caused by speculation and fraud on the grand scale, with huge amounts of money being put at risk, all at once.

There have been signs of personal income slide for many years, ignored: I remember when the first Bush was "President"--(not the current asshole, the first asshole)--and a fact came out that used vehicle sales exceeded new vehicle sales for the first time, I believe, if I remember correctly, ever. No attention, when that seems a dire warning. Then NAFTA, etc., union manufacturing jobs lost, outsourcing, reduced incomes, two jobs instead of one needed, etc. No attention given. A few years ago, the official statistics started showing "negative savings,"--that is, none--because of flat wages and escalating prices, the first time since the Depression. No attention. Things have been coming undone for many years on the personal scale, but when they actively started deregulating and removing the laws of commerce and finance, then it collapsed. People didn't used to have credit cards generations ago, but they had (secure) bank loans, accounts at indiviual stores, "time payments" or installments, etc., so it was actually similar. Why would it suddenly collapse, unless it was something else?

It seems to me, again as one who is not an economist but trying to be commonsensical, that what caused it could only have been the orgy of speculation on inflated stocks, commodities, (whatever else they have now), buying them with paper claims of money from other speculation they actually didn't have the money for, then as some of the false "worth" of some of it began to be exposed, a panic of selling, dumping, etc., "banks" (deregulated brokers and investors) calling for debts to be paid, and the people actually did not have the money. Bankruptcies, collapse, etc.--just like 1929. It had to be mass activity and fraud; insider trading, double-bookeeping, all the rest. The only way that individuals and credit cards could explain it, is if they lost their source of income and the credit card corp. suddenly demanded all of its payment, which of course they do not do. That still does not explain how the whole economy and country would collapse, and not just the individual people involved.

I also do not agree with the claim of reply #43, that "When people can no longer pay, prices will come down." This is not true as a practical fact, and will not solve anything. During the Depression, for example, people were suffering, unemployed, losing their homes/farms, etc., since late 1929, and was really bad from 1930 on. Prices did not even begin to drop a lot until 1932-1933, and long before then, corporations had cut the salaries of workers, and wholesale laid off millions, to try to balance their own corporate books, which they always do first, and so there were no "savings" to the majority when prices did finally fall--they long ago stopped being able to afford anything anyway. There are always years of Government attempts to keep prices up, (taking food off the market, etc.) before there is ever any consideration of just dropping them. They always, as we now know again, protect the "market" first, not individual people. Low prices did not benefit people; they had lost their salaries, or even jobs, first, and it was years later that it even happened. This seems to be the rather naive belief that there is ever any circumstance where the worker can "get ahead of" the corporation, or the game. This will never happen.

People go into debt for things that not possibly be paid for all at once: medical expenses, house, vehicle, school tuition, home repairs, etc. This constant universal cannot be the problem; as a matter of fact, Census figures always show that consumer purchases account for some two-thirds of the entire Gross Domestic Product. It helps the economy, not hurts. If there is a loss of income, then it is unemployment that is the problem, not debt that is being paid. The OP quotes some capitalist ideologue near the end, claiming "The credit card industry could be the next domino to fall if consumers don't get a handle on their personal finances soon." The credit card industry's most lucrative profits come from those who never pay off the card, who are paying fees, and interest, and penalites forever, and increasing the amount. Those who pay their debts are money-losers for the credit industry. Anyone who makes a remark like that, is a total liar.


No economy ever recovered by giving it all to investors who are rich anyway, do not provide a service to the economy, and most of whose clients (homeowners, people with credit cards or loans, etc.), still cannot pay their bills and keep the corporations afloat after the fake bailout. What will these mortgage-holders, etc., do next, when the people still cannot pay? Give the money to the people with unpayable debt, with the provision that it go to the mortgage, credit card, etc., and so the things are paid off and people saved, AND the corpoartions get their money!

[SoCalDem]

55. Actually, customers who pay off every month are known as "deadbeats" within the CC industry

and if you do not use a card for a very long time, they will quite often just cancel it, or not send you a new one when it expires..

and yes.. people USED to use cards for expensive things they could not pay for all at once, but as wages kept falling, and prices kept rising, more and more people HAD to fill the gap with something... that something was credit cards, followed by home-equity tapping to pay off the cards every now and then...

I agree.. there was some big-time behind-the-scenes meddling, and this "CRISIS" button was pushed, but when enough people just say.."enough..I can no longer pay these CC bills, and I have already lost my house.credit rating..big deal"..

[Liberal_in_LA]

56. "consumers are now just tapped out" yep.