Economic Meltdown Zombies II

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Just over a month ago, Peculiar Progressive warned you about Wall Street sneaking back into its old evil ways that led to the 2007 global economic meltdown: voraciously marketing derivatives and gouging poor-credit consumers with subprime loans.

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Subprime auto loans wrapped in red.

While in the early 2000s, the large subprime loans were for mortgages, recent reports show the Wall Street wolves had turned more to small businesses.

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Now add to the mix increases in subprime lending for automobiles and credit cards—a further sign that Wall Street is moving America, and the world, back toward another economic tragedy.

The numbers aren’t as large as the fat meltdown of 2007, when we had been sold on the idea of a booming economy, which wasn’t. But the reality is the current economy still sucks, as does employment and salaries for employees who aren’t chief executives. And, if you ever blew soap bubbles from a little plastic ring as a kid, you know another reality: some bubbles may be gigantic, and some may be miniscule…but they all pop. And a factual poor-economy bubble may just pop faster than a false surging-economy bubble.

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What will certainly add to the problem: Banks are taking those subprime auto loans and credit-card contracts and bundling them into securities, just like the pre-meltdown days. They’re selling those securities to pension funds and insurance companies, just like the pre-meltdown days.

So we’re seeing the Wall Street wolves—through these combined efforts with subprime small business loans, auto loans, and credit cards to consumers with no earning power—further feed the dangerous derivatives industry through bundling with securities. And investors, caught in a zero-interest market, are craving to find profits anywhere they can…meaning they’ll take greater risks to make money. And these bundled products—that derive (and are therefore called “derivatives”) from subprime loans—are risky indeed.

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Crash-spotter William White

The Analyst and Numbers
William White, a Canadian economist famous for predicting the 2007 global economic meltdown, was interviewed today (Monday August 4) on the TV financial news show Boom Bust. White, now chairman of the Economic Development and Review Committee at the Organisation for Economic Co-operation and Development (OECD) in Paris, said today’s economy is “a black box” where “there are a lot of things that can go wrong.”

White specifically cited concern over looming debts.

“In the crisis of 2007, debt was allowed to build up,” he said. “Unfortunately the current debts of the G20, as a proportion of GDP, are 30% higher than 2007.”

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He noted that both household debt and government debt worldwide are “huge.” As for the U.S., he cited wage stagnation and zero interest rates as reasons that households had to take on debt, in efforts to make ends meet.

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That household debt can only increase with banks’ current hyper-hawking of subprime auto loans and subprime credit cards.

You can immediately see the rising problem in a July 19 New York Times article ominously headlined “In a Sub-Prime Bubble for Used Cars, Borrowers Pay Sky-High Rates.” That article reports:

Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.

 

The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.

 

And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.

The article also explained that the ratings agency Standard & Poor had warned against growing losses due to subprime auto loans. But the article said:

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Despite such warnings, the volume of total subprime auto loans increased roughly 15 percent, to $145.6 billion, in the first three months of this year from a year earlier, according to Experian, a credit rating firm.

Research shows that the subprime credit-card push from banks began as far back as 2011 (as did subprime auto loans). The New York Times, in an April 10, 2012 article, explained:

Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.

Where does that put American households today? USA Today reported July 29:

More than a third of the country is in trouble when it comes to paying debts on time; 35% of Americans have debt in collections, according to a study out Tuesday from the Urban Institute, which analyzed the credit files of 7 million Americans.

 

That means the debt is so far past due that the account has been closed and placed in collections. This typically happens after the bill hasn’t been paid for 180 days. It also means the debt has been reported to credit bureaus and can affect someone’s credit score.

 

The 77 million Americans with debt in collections owe an average of $5,200. That includes debt from credit card bills, child support, medical bills, utility bills, parking tickets or membership fees.

That’s debt in collections. Overall, Americans’ credit card debt is $1 trillion. Add to that an over $1 trillion college-loan debt,  a national debt of $12.5 trillion (held by the public), and national infrastructure needs of $2.3 trillion, the economy is shaky.

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Still, the major problem worldwide remains Wall Street’s ravenous growth in derivatives. Peculiar Progressive earlier reported that the Bank of International Settlements (BIS) issued a report stating great concern over the derivatives market, now over $700 trillion, much greater than its $600 trillion at the time of the 2007 global economic crash.

The EOCD’s White, who is a former economist for the BIS, said he concurred with the report’s concern.