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Deleveraging Pt 2

Posted by:  Chip Poli
2011-12-09 13:50:40

Household Debt


Continuing on yesterdays post Great American Deleveraging: Household debt graph We can glean a little more good news out of this chart from the NY Federal Reserve Board. This graph shows the aggregate amount of total Household Debt outstanding in Trillions.

We peeked in late 2007 at roughly $11.9 Trillion and we have deleveraged today, to about $10.2 Trillion. In this day in age, $1 Trillion doesn’t seem like much any more. So, what’s the big deal? We eliminated only $1.7 Trillion in household debt, that’s not much?

First, A Trillion is A Lot. Let’s put it this way.

1 Million seconds is approximately 12 days.

1 Trillion seconds is approximately 31,000 years.

Yes, $1.7 trillion is a ton of money.

Second, many economists believe that actual debt numbers were much higher and the numbers the Fed keeps are skewed.

We’ve managed to wipe out a lot of debt, we did it in a number of ways:

  • Bankruptcy
  • Forgiven or Settled Debt
  • Paid Down
  • Natural Amortization
  • Stopped Paying and Defaulted
  • Foreclosure

Thankfully, they are all acceptable forms of consumer deleveraging during and after a major crisis. We have a long way to go, in order to get back to acceptable levels, not sure where acceptable is but, at least we’re headed in the right direction.

As home prices come back to normalized levels, the bulk of this household mortgage debt will come down slowly. It will take time for the remainder of the high value loans to work out of the system and allow people time for the natural amortization of debt.

While Credit Card debt is the most hurtful, being it is usually unnecessary (and highly speculative), interest is never tax deductible, not to mention it never seems to amortize itself naturally.

The biggest piece of the pie is impossible to ignore, mortgage debt.

More importantly mortgage debt relative to home values.

A homeowner must be motivated to stay in their home because of the potential loss of equity if they were to foreclose. If they are not motivated by fear of potential loss of equity, they will let it go. This has already played itself out.

We can hope that the savings rate is dipping to low levels again only due to high unemployment and once people are back to work, the personal savings rates will head up to healthy levels.

Once people are able to sell their homes again at normalized prices, then we’ll see the household debt continue to drain off.

The Risk of Forgetting


But we still run a major risk, the risk of forgetting.

No it’s not the governments job to remind us, it’s not a banks fault if they send us a credit card offer and we take it, it’s not anyone else’s job but our own to remember that in order to sustain during a downturn we need to keep our leverage down and our equity up.

Less needless borrowing and more careful saving.

We need to be sure that the availability of credit is not dictating our own personal savings rate.

Remember this?

April 2, 2007: New Century Financial Corp., which specialized in loans to people with poor credit, files for bankruptcy protection after being overwhelmed by customer defaults.

July 17, 2007: Investors in two Bear Stearns Cos. hedge funds that invested in collateralized debt obligations backed by subprime mortgage loans are told there is no value left in the funds, wiping out $1.6 billion originally invested.

July 19, 2007: Federal Reserve Chairman Ben S. Bernanke tells the U.S. Senate's Banking Committee that there may be as much as $100 billion in losses associated with subprime mortgage products.

Aug. 22, 2007: Countrywide Financial Corp., the biggest U.S. mortgage lender, sells $2 billion of preferred stock to Bank of America Corp., the biggest U.S. bank by market value, to bolster its finances.

Oct. 30, 2007: Merrill Lynch & Co. ousts Stan O'Neal as chairman and chief executive officer after reporting a $2.24 billion loss, six times bigger than a forecast the firm offered just three weeks earlier.

Nov. 4, 2007: Citigroup Inc. CEO Charles ``Chuck'' Prince, who took over in 2003, steps down after the largest U.S. bank by assets increased its estimate for mortgage-related writedowns.

Jan. 11, 2008: Bank of America, the biggest U.S. bank by market value, agrees to buy Countrywide for about $4 billion.

March 14, 2008: Bear Stearns Cos. gets emergency funding from the U.S. Federal Reserve and JPMorgan Chase & Co. as a run on the bank depletes its cash reserves in three days.

April 9, 2008: Washington Mutual Inc. rejected an offer from JPMorgan Chase to buy it for as much as $8 a share, or $7 billion, before announcing it received a $7 billion capital infusion from a group led by TPG Inc., the Wall Street Journal reports, citing people familiar with the situation.

May 31, 2008: Bear Stearns ceases to exist as the acquisition by JPMorgan is completed.

July 11, 2008: IndyMac Bancorp Inc., the second-biggest independent U.S. mortgage lender, is seized by federal regulators after a run by depositors depleted its cash.

Sept. 7, 2008: The U.S. government seizes control of Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies.

Sept. 15, 2008: Lehman Brothers Holdings Inc. files the largest bankruptcy in history, and Bank of America agrees to acquire Merrill Lynch for about $50 billion.

Sept. 16, 2008: American International Group Inc. accepts an $85 billion loan from the Fed to avert the worst financial collapse in history, and the government takes over the company.

Sept. 26, 2008: The U.S. Securities and Exchange Commission ends a program that monitored securities firms' capital after Morgan Stanley and Goldman Sachs, the only companies remaining under its jurisdiction, became banks overseen by the Fed.

Sept. 26, 2008: Washington Mutual Inc. is seized by government regulators and its branches and assets sold to JPMorgan Chase in the biggest U.S. bank failure in history and files for Bankruptcy protection the next day.

Sept. 29, 2008: The House of Representatives rejects a $700 billion plan to rescue the U.S. financial system, sending the Dow Jones Industrial Average down 778 points, its biggest point drop ever. Citigroup agrees to acquire the banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages. Bradford & Bingley Plc, the U.K.'s biggest lender to landlords, is seized by the government. The Dow closes below 11,000.

Oct. 1, 2008: The U.S. Senate approves a revised version of the rescue plan that was refashioned to entice enough votes for passage.

Oct. 3, 2008: The House passes the revised version of the rescue plan. Wells Fargo & Co., the biggest U.S. bank on the West Coast, agrees to buy all of Wachovia for about $15.1 billion, trumping Citigroup's government-assisted offer. U.S. President George W. Bush signs the rescue plan into law.

Oct. 6, 2008: The Fed says it will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens.

Oct. 9, 2008: Citigroup walks away from its attempt to buy Wachovia, handing victory to Wells Fargo. The Dow Jones falls below 9,000 for the first time in five years and briefly dips below 8,000.

Oct. 13, 2008: The Fed leads an unprecedented push by central banks to flood the financial system with as many dollars as banks want, backing up government efforts to revive confidence and helping to reduce money-market rates.

Thank You Bloomberg for this data

And it went on, and on, and on…

The complete collapse of liquidity in the financial markets and subsequent recession/depression that ensued, bringing unemployment rates to above 9% levels, decimated an entire industry in Real Estate, moved entire countries to bankruptcy, wiped out retirement accounts, caused the United States Government to lose its perfect credit score and flooded bankruptcy courts with filings for years to come.

The worlds largest mortgage lender collapsed, three of the oldest and most respected investment banks completely gone, over 400 banks have been closed since 2007.

Commercial properties in prime markets are worth 25% less than they were just a few years ago.

In November, 2011 even as we are coming out of the dark, 33 Banks closed their doors this month alone.

FDIC Closed Bank List

15 Million people out of work. Another 10,000,000 considered “under-employed”.

Unemployment among younger Americans hovering around 20%.

An entire generation of hard working retirees are now facing another 5+ years plus of working due to evaporated home equity.

These events are far more severe than the crash that sparked the Depression.

Even after all of this, will we forget what happened too quickly?

Sub Prime Era Kids


The Greatest Generation managed to not only come back but thrived for 30 years, after some pretty rough times during the depression.

They never forgot.

Will we forget too easily the times we just went through? Was 2007 and 2008 “not that bad”?

We didn’t have people waiting in lines for bread, stale, old, musty bread.

We didn’t have people waiting in long lines for work, you know, the pictures we see from the depression.

Has quality of life elevated to the point where we just simply will not remember the hard times? Because they weren’t that “hard”?

Depression Era people, like your grandma, never forgot, it didn’t matter how much leverage a bank was or is willing to give her.

She won’t take it. One would think, given the circumstances of 2007 and 2008, that we would remember the tough times, many would argue we’re still in them.

Certain aspects definitely exacerbated the events that led to the rapid decline in the US Economy, there are definitely people to blame and companies to point fingers at. However, it still remains our job to….remember.

Will we have a generation of Sub Prime Era Kids?

Is quality of life in America simply too high to have those scarring memories, like your egg carton saving grandmother has?

Only time will tell whether we are doomed to repeat the 07-08 crisis, for now, things are looking up a bit. And that is Very Good News.

Tomorrow we’ll take a look at whether or not those direct descendants, yes the actual children of the Depression Era Generation may have played a role, with some help from lawmakers and home builders, in making the sub-prime crisis even worse than it should have been.

Did Age Restricted Housing Fuel the Housing Crisis?

 

Reference:

Graphs and Data NY Federal Reserve

Graphs and Data St Louis Federal Reserve

Meltdown Timeline Bloomberg.com

FDIC

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