Not Much Better than at the Peak of the Bubble

In "Knee-Jerk Relativism," I highlighted a Philly Post article detailing how incomplete, inconsistent, or irrelevant statistical comparisons serve to paint a distorted picture of where things stand in today's economy.

As it happens, an article in today's New York Times, "Debt Burden Lifting, Consumers Open Wallets a Crack," makes what I believe is a similarly misleading claim about Americans' financial health:

The bursting of the real estate bubble and the ensuing credit crisis forced American consumers to do something that they had little experience in trying: reduce their debt.It has been a painful process both for borrowers, who have faced foreclosures and bankruptcies, and for lenders, whose have had to take losses vastly in excess of what they thought possible.

But the process is working far faster in the United States than in countries like Britain and Spain, which also faced plunging real estate prices. And now it appears to be contributing to an economic recovery that has gained a little momentum, despite facing headwinds from the European debt crisis. This week’s report that retail sales grew faster than expected in March was the latest sign that consumers — or at least a substantial number of them — are growing more optimistic.

One measure of the financial health of householders is the level of financial obligations, like required mortgage and credit card payments [as well as pay day loans], to disposable income. By the fall of 2007, those obligations took up 14 percent of disposable income, more than at any time since the Federal Reserve began calculating the statistic in 1980.

But now the situation has turned around. The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.

While it's all well and good to say that monthly outlays are less than they were, this development likely reflects the fact that, thanks to the Fed's machinations, interest rates are at historic lows, while maturities for certain kinds of financing, including cash loans, have generally increased as lenders try to keep payments at manageable levels.

The reality is, if you compare the financial obligations ratio cited in the Times article to the ratio of average household debt to median household income, as I've done below, it's apparent that the financial position of U.S. consumers is not much better than it was at the credit bubble's peak.

In the end, it's not just the amount that people shell out each month that matters; the amount they owe also has a strong, if not stronger, impact on their willingness to spend. Under the circumstances, I wouldn't hold out much hope that a consumer recovery is on the way.

Comments

[Don't forget to fill'er up]

Caught in commuter hell of mortgage and petrol costs

With their second car permanently in the driveway because they can’t afford to run it, the couple’s work and family life now revolves around commuting as cheaply as possible.

“I’ve talked to my boss so that I can have roughly the same hours as my husband because of fuel,” says Kiera.

“Fuel is just taking a massive chunk out of our salaries. Even with one car, it’s becoming frightening to see how much money we put in every week.”

http://www.irishtimes.com/newspaper/property/2012/0419/1224314920494.html?via=mr

[Wolfie52]

Damn, I read that article in the "NY Times" and wanted to respond, but Michael, you do it so much better! I know from what I see, that most of the debt that has been "reduced" has simply been "written off".

My neighbor is the epitome of what has happened recently. They "bought" (we need to change the terminology to rented money- to MAYBE someday-own-a-home) their house in 1998 for about $180K. They have refinanced several times, that last being in 2010 for about $200K. The Zillow and Tax value of their home is max $186K as of 4/12. So in 14 years they have paid NOTHING on their house. If they had to sell it, they would have to PAY MORE $$! Nada, zip, and to top it off they are near retirement age! Don't know about their 401(k) balances, but I can imagine if they can't make financial progress on their home, that they have little savings as well. Sad, but common.

[Elicit]

Thank you.

Bernanke has been claiming that because the ratio of average disposable income to debt is low, households are in good shape. The fact is that for the top 10%, the economy is better than ever, and they are skewing the metrics. If the US government and federal reserve posted all household data on a per-decile basis, then we would know whether the economy is improving for everything or just for a few of the lucky (rich).

The fact is that without an increase in earnings, across the board, any thought of recovery is just a wet dream. This economy needs wage inflation so that we melt down the debt overhand. Those with a very poor understanding of the economy think that wage inflation is the worst of all evils, and these are the people in charge.

I guess that the policy makers never talked to the modern-day evuivalents of the Joads.

Every indication is that this economy and stock market are about to tank again. Ad infinitum unti we have leadership.

[Tom]

Elicit, i agree completely. Your last statement has a flaw, however. There will be no "ad infinitum" in this case. We're fast running out of time (to change environmental policy in enough time to be effective) due to the real problem of critical climate change difficulties like the ability to grow enough food for ourselves (or harvest it from an increasingly polluted and overfished ocean), lack of potable water (due to fraking, drought and flooding, and sea level rise), muster the energy to keep up with infrastructure maintenance (Peak Oil and financial imbalance and ultimate collapse), overpopulation and the limited carrying capacity of the planet.

We're in real trouble and this financial aspect is but one feature of the on-going bottle-neck event that may collapse the human species as well as myriads of others needed by us to survive. Expect it to get continually worse in the coming years (at best in fits and starts or a "controlled" diminution, but more likely to be a series of catastrophic failures of interconnected systems).

[When the public gets angry enough things may change]

Chris Whalen: The Fallacy of “Too Big To Fail”–Why the Big Banks Will Eventually Break Up
Why politicians let MF Global investors get taken

http://www.financialsense.com/financial-sense-newshour/guest-expert/2012/04/20/chris-whalen/fallacy-of-too-big-to-fail-why-big-banks-will-eventually-break-up

[Not much justice]

SEC Pursues Egan Jones; Moody’s, S&P Remain At Large

Here we have an allegation of a specific error, made in good faith by Egan Jones, over the course of doing business.

At the same time, we have a broad set of systemic errors made by the two much larger competitors, Moody’s and Standard & Poors. These two firms, by design, gave triple AAA ratings to piles of junk paper. They did so because that was what they were paid to do by the underwriters.

These were not good faith errors. They were instead a reflection of a wholly corrupted industry, designed to mislead investors and legitimize junk paper. Consider what Nobel prize winning economist Joseph Stiglitz observed:

“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.” (Bloomberg)

Somehow, these two whales of corruption get a pass. I don’t get it . . .

http://www.ritholtz.com/blog/2012/04/moodys-sp-remain-at-large/

[You, too, can be a master of the universe...if Uncle Ben permits]

Free $10 Million Loans For All! and Other Wall Street Notes

In it, Bair points out that since we’ve been giving zero-interest
loans to all of the big banks, why don’t we do the same thing for
actual people, to solve the income inequality program? If the Fed
handed out $10 million to every person, and then got each of those
people to invest, say, in foreign debt, we could all be back on our
feet in no time:

Under my plan, each American household could borrow $10 million
from the Fed at zero interest. The more conservative among us can take
that money and buy 10-year Treasury bonds. At the current 2 percent
annual interest rate, we can pocket a nice $200,000 a year to live on.
The more adventuresome can buy 10-year Greek debt at 21 percent, for
an annual income of $2.1 million. Or if Greece is a little too risky
for you, go with Portugal, at about 12 percent, or $1.2 million
dollars a year. (No sense in getting greedy.)

Every time I watch a Republican debate, and hear these supposedly
anti-welfare crowds booing the idea of stiffer regulation of Wall
Street, I wonder how many audience members know that Bair's plan is
more or less exactly the revenue model for all of America’s biggest
banks. You go to the Fed, get a buttload of free money, lend it out at
interest (perversely enough, including loans right back to the U.S.
government), then pocket the profit.

Read more: http://www.rollingstone.com/politics/blogs/taibblog/free-10-million-loans-for-all-and-other-wall-street-notes-20120419#ixzz1saader7l

[People better wake up!]

Getting Paid 93 Cents a Day in America? Corporations Bring Back the 19th Century
Nearly a million prisoners are working in call centers, working in slaughterhouses, or manufacturing textiles while getting paid somewhere between 93 cents and $4.73.

Today, we are being reassured by the president, the mainstream media, and economic experts that the Great Recession is over, that we are in “recovery” even though most of the recovering patients haven’t actually noticed significant improvement in their condition. For those announcing its arrival, “recovery” means that the mega-banks are no longer on the brink of bankruptcy, the stock market has made up lost ground, corporate profits are improving, and notoriously unreliable employment numbers have improved by several tenths of a percent.

http://www.alternet.org/rights/155061/getting_paid_93_cents_a_day_in_america_corporations_bring_back_the_19th_century/?page=entire

[That word hope really doesn't seem to work out too well]

Atlas Shrugs, Orwell Yawns

Be all of that as it may, the SEC has decided to go after Egan Jones for these "misstatements" from 2008. Why all of a sudden did the SEC decide that Egan Jones committed violations four years after the fact? Having been through SEC/FINRA regulatory application processes several times over the past 25 years, I can say with certainty that, at most, the Egan Jones "misstatements" were most likely nothing more than clerical errors or general oversight. I'm sure 90% of all regulatory applications have these issues. It was certainly, to be sure, nothing to do with Egan Jones' ability and competency to analyze and assess credit ratings.

What really blows my mind is that the SEC looks the other way when Jon Corzine, MF Global, JP Morgan, Goldman Sachs, Bank of America et al, ad nauseum commit grave and obvious crimes of theft and fraud. Why isn't the SEC scouring over these firms' regulatory applications in order to come up with meaningless filing violations?

Anyone who truly believes that this action by the SEC is merely coincidental to Egan's ratings downgrade of Treasury bonds two weeks ago has been spending too much time at too many 420 celebrations. It's getting worse by the day, as the Government enables the big wealthy entities who fund elections and Presidencies to get away with murder and capriciously enforces rules and laws against those who are not always in a position to properly defend themselves. Hopefully Sean Egan owns his own politician or Government official who is in a position to deflect this nonsense, although I doubt he does because this would not have happened in the first place if he did.

And Obama was supposed to change all of this.

http://truthingold.blogspot.com/2012/04/atlas-shrugs-orwell-yawns.html