More Good News: Record High Credit Card Defaults 30 comments
May 17, 2009
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No, seriously - this is actually good news. The basic problem was an overleveraging across all sectors of the economy and this is good news because the US consumer unequivocally needs to deleverage before a recovery can be viable. The choice has always been simple if you owe too much money: declare bankruptcy, inflate your way out of it or find a sucker to help you roll it until you can pay it off.
The inflation part is both politically and socially intractable (pop quiz: what do the AARP and the largest Communist nation in history agree on?) - the level of inflation needed to devalue our debt would start approaching historical levels. Maybe not as bad as Weimar Republic or Zimbabwe levels, but significant enough to really hurt.
Pitching increased capital suckage into the US economy until we can slowly repay our debt back also doesn't seem like a great option. The pitch may go well and the capital may be out there but inherently it assumes a level of self-restraint and foresight that is laughably distant from our American democracy. When we are still wasting billions on Cold War weapons, it is tough to believe that as a nation, we will patiently delever.
In practicality, as always, the answer will be some combination of the three options. Bankruptcy is tremendously traumatic on a personal level, not to mention the lasting effect that it has on your credit score and the waterfall effects of that. However, on a macro level it is good and serves a very practical purpose - it wipes out debt, allows the economy to bounce back rather than stagnate in zombie land and punishes lenders for making stupid decisions. Some may argue that it makes debt more expensive - we would argue it more accurately prices money going forward. Which would you rather have?
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One should never buy something that one needs to borrow at high interest rates to do so. It may be argued that once in a while in an emergency its understandable but even then that's usually a result of poor planning before the event happened. So many people live their lives like their car will never break down and/or unexpected expenses will not happen to them.
At first glance before reading the article I thought it must have been a typo or a joke.
Yes, I would concur with your theme. This kind of outcome should have been prescribed for the housing and auto situations at the onset, to let the system flush itself out, let the weak ones go away, so that we could have that "V" shape vigorous and vehement rebound.
Rather, and sadly, the Obama regime waded into the sinking sand, muddling along, procrastinating, which would ultimately prolong that much awaited recovery.
If you read all the above comments, they all come down to one thing.
You need your government to provide regulation of the financial markets. Similar to what the other resonsible governments of the world already employ:
-Banks should not be insurance companies (Rule from 30s depression)
-Insurance companies should not be banks. (Rule from 30s depression)
-10% down for a mortgage - maximum 25 year term. No exceptions.
-Personal debt liabilities cannot exceed 40% of gross earnings.
These simple regulations ensure that everyone stays on the right side of the line to ensure a healthy and prosperous country.
Yet even after this disaster in the USA, all I hear on the US news is that any type of government regulation is anti-capitalism... Capitalism was born from this type of structure. It ensures the welfare of everyone involved.
Kirk
The business world works under contracts, and If there is a contract between them and the companies they work for that says that they would be paid so much compensation and bonuses on such dates, that is IT. Our law courts are not there to judge on moral hazards, although the laws are often written to safeguard and protect such, directly or indirectly.
So much for any retribution. In the S & L debacle, Milken got off with billions and even staged his Come to Jesus show in the aftermath.
Who says life is fair? (The Christian Bible does have something to say about the after life, but that is a different matter).
Teutonic
No. There has always been a fourth choice for the vast majority of people (the exceptions being the very poor and the jobless): Tighten your belt, lower your standard of living and pay off your debts. You don't have to find a sucker to roll it over--your debt is already owed to specific mortgage lenders, credit card companies or other businesses. You may have to stretch out the payments.
They lower the limits tell FICO so then FICO LOWERS YOUR SCORE. And then notifys the the other CCC,s who lower your score. FICO should be investigated. When CCC,s ask if you have a will thats coercion. And the BANKS (to big to fail) think the publicshould bail them out. IT,S SICK
1.) Re: "wasting billions on Cold War weapons," If that money (capital suckage) could be diverted to more productive uses, what would those uses be?
2.) Re: the "macro level" of bankruptcy," Are you talking about a wide swath of the American public declaring bankruptcy (which will probably happen no matter how the three options play out), or are you suggesting that the US government itself burst the credit bubble by applying (when the time comes) for that dreaded condition?
3.) Comment: God gave Moses some principles concerning these problems. They can be found in the last three chapters of Leviticus. Here's a sample: (Lev. 25:28) "But if he has not found sufficient means to get it back for himself, then what he has sold shall remain in the hands of the purchaser until the year of jubilee; but at the jubilee (every 50th year) it shall revert, that he may return to his property."
Something, perhaps, to think about.
I am at a loss to understand why there aren't riots in the street in this country. Perhaps I am just a bit ahead of the masses at this time.
On May 17 11:24 AM Teutonic Knight wrote:
> Inasmuch as I would agree with youngolf and MikeOz's comments about
> the greedy CEO's making a bundle off, I would like to point that
> that under the present Law there is probably nothing illegal in what
> they had done.
>
> The business world works under contracts, and If there is a contract
> between them and the companies they work for that says that they
> would be paid so much compensation and bonuses on such dates, that
> is IT. Our law courts are not there to judge on moral hazards, although
> the laws are often written to safeguard and protect such, directly
> or indirectly.
>
> So much for any retribution. In the S & L debacle, Milken got
> off with billions and even staged his Come to Jesus show in the aftermath.
>
>
> Who says life is fair? (The Christian Bible does have something to
> say about the after life, but that is a different matter).
>
> Teutonic
On May 17 08:12 AM tedster98 wrote:
> Bankruptcy is never good. People need to live up to their obligations.
> This is the main problem with the USA today. Lack of integrity.
There are not riots in the streets because social mood isn't quite ready for that yet. Watch the Dow - it is a fine barometer for this sort of thing. When it breaks the March lows, I think you'll start to see violent mass demonstrations.
Cornelius is right. The credit inflation created far too much credit to be paid off. SOME of it is Going to be defaulted on, it is inevitable.
remoran, money is based on GOOD debt. The excess is calling into question the value of the rest. It has to go.
But when policymakers decide that lenders and their bond holders are to be bailed out by taxpayers, it is the latter who are punished for the former's stupid decisions.
Executives have become lazy, design incentive programs around income because they never learned how to lead and motivate for a companies long term benefit.
What is the deal with NY AG's office et al and SEC negotiating financial settlements for illegal decisions/activities for fines only
without pressing criminal charges? We need a game changer now, send a few executives to hardcore jail for a few years. White-collar crime needs to be treated on par with drug or violent crime.
I believe that consumers and taxpayers sentiment will emerge as key factors in deciding the fate of these so many "too-big-to-fail bailed-out" corporations. For, without a customer, there would be no jobs, and without the jobs, there would be no need for the corporation to exist. But of course, the government is that final too-big-to-fail entity. The end will come when we default.
On May 17 08:45 PM prudentinvestor wrote:
> "..it wipes out debt, allows the economy to bounce back rather than
> stagnate in zombie land and punishes lenders for making stupid decisions."
>
>
> But when policymakers decide that lenders and their bond holders
> are to be bailed out by taxpayers, it is the latter who are punished
> for the former's stupid decisions.
Credit card delinquencies and charge offs are at record highs. Inflation can be used to reduce debt but it has other bad consequences - collateral ripple losses and consequent disruption of the system.
Just remember it is the assets that diminish but debt is forever.
low interest loans and i have a good portion of those paid off and only owe 7000k with an interest rate around 4%
But apparently we do; something has to break somewhere. I suppose that when it does, we'll have a pretty good view of the unfolding events here on Seeking Alpha. Thanks to Cornelius for the informative article, and to you commentators for expanding the discussion. I learn a lot just hanging around.