A Look at Averages

Is household debt manageable? That is the question of the day.

Bernanke sure seems to think so, at least according to this Chicago Tribune headline: “Bernanke: Household Debt ‘Manageable'”:
“Household finances are in good shape even as the greater availability of credit has led to higher levels of debt, Federal Reserve Chairman Ben S. Bernanke said.

“‘U.S. households overall have been managing their personal finances well,’ Bernanke said.

“‘Debt burdens appear to be at manageable levels, and delinquency rates on consumer loans and home mortgages have been low’…

“A ratio of debt payments on mortgage and consumer debt to personal income stood at 13.86% in the final quarter of last year, the second highest in Fed records going back to 1980. Bernanke noted that rising debt burdens have been partially offset by increased asset values as household net worth ‘is at a fairly high level.'”
Bernanke never checks into my blog to answer questions, but I have several anyway:

1. Since when do asset bubbles in houses or stocks justify piling on debt?

2. Given that real wages are falling and debt payments are the second highest in history, on what basis do you find “U.S. households overall have been managing their personal finances well”?

3. Which direction are bankruptcies and foreclosures headed?
In a slightly different slant on this story, MarketWatch is reporting the spin like this:
“Despite the complexity of financial products and wider availability of credit to families with low to moderate incomes, U.S. households appear to be in managing their debt well, said Fed chief Ben Bernanke on Tuesday. ‘U.S. households overall have been managing their personal finances well,’ Bernanke told a seminar on Capitol Hill. ‘On average, debt burdens appear to be at manageable levels and delinquency rates on consumer loans and home mortgages have been low,’ he said. Bernanke did not discuss monetary policy in his prepared remarks. Bernanke said the central bank will continue to make financial education a priority to help families of modest means build assets and improve their economic well-being.”

Debt vs. Wages

“On average, debt burdens appear to be at manageable levels.”
Let’s consider one of the problems with “averages.” On average, two cars racing up a mountain are both enjoying the view, even if one plunges over the side of a cliff somewhere near the top. Perhaps a more practical example is the fact that average wages are rising even though median wages are falling. More than 50% of the population is worse off than a few years ago. This is unprecedented in a recovery. Yet “on average,” things are humming quite nicely, especially if you count CEO stock options, salary hikes, and Wall Street bonuses. So why, “on average,” should anyone be concerned?

Writing for The Daily Reckoning, Bill Bonner had this to say:
“The 26 top executives at Toyota Motor Company earn an average of $320,000. Good money, but hardly obscene. Toyota is a growing, profitable concern…

“The heads of America’s 500 biggest companies received an aggregate 54% pay raise last year. As a group, their total compensation amounted to $5.1 billion, versus $3.3 billion in fiscal 2003. G. Richard Wagoner Jr., heading up Toyota’s rival, General Motors, received total compensation of $8.5 million. That’s what you get when capitalism enters its degenerate phase. The parasites make sure they get their money…even as the company sinks.”


Chron.com is reporting, “Foreclosures Rising With Debt, Job Losses”:
“Nationally, foreclosures are up 38%, higher than in any quarter of last year, property tracker RealtyTrac said.

“The numbers are even grimmer in the Midwest. Michigan and Ohio, battered by automotive-related job losses, together recorded 45,000 mortgages entering some stage of foreclosure in the first quarter. Those are increases of 91% and 39%, respectively, compared with last year’s fourth quarter.

“There are many reasons for the growing number of defaults, and there are suggestions that the foreclosure trend may soon worsen.

“Layoffs because of corporate downsizings, health care issues, increasing debt levels, and rising interest rates all are factors. In addition, a growing number of homeowners is relying on adjustable-rate mortgages, catching some people by surprise when their monthly payment rises.”

Auto Loans

Without even opening the Mish Telepathic Question Line, a question managed to sneak through: “Mish, what about cars?” That’s a good question. Let’s take a look.

The Arizona Republic is reporting car buyers are stymied by negative equity:
“Zero-interest deals and long-term car loans are boosting sales, but they are producing one troubling side effect — a growing number of drivers owe more on their vehicle than it’s worth at trade-in time.

“Last month, nearly 29% of U.S. car buyers found themselves ‘upside-down’ on their loans, owing an average of $3,789 more than their trade-in value — for the highest level since September 2004.

“Loan officers and car dealers call it ‘negative equity,’ and there are plenty of negatives to it.

“First, car buyers often pay more interest as they roll old upside-down loans into new car purchases.

“Second, they will be saddled with higher payments that make it harder to save for their next car or keep up with their current loans.

“Third, those buyers are instantly turned upside-down in their new purchases, creating a vicious cycle of excessive debt…

“Longer car loans are the prime factor flipping car buyers upside down, experts say. Where the average car loan in 2003 lasted for 60 months, it’s crept up to 64 months today, says Jesse Toprak, executive director of the Edmunds.com, a Web site for car shoppers. Part of the reason is the introduction of the 72-month loan.

“‘Seventy-two months is sort of becoming the norm,’ Toprak said. ‘Unless you put a substantial amount of money down, you will have negative equity’…

“But not every upside-down buyer has a choice, said Dorothy Guzek, a budget counselor with Greenpath Debt Solutions in Troy [Mich.].

“She described cash-strapped clients who need cars to get to work but can’t afford much and end up financing undependable vehicles.”
“On average,” things are fine here too, I suppose. After all, a mere 29% of buyers are upside-down on their car loans.
Does Bernanke worry about this when it hits 51%, and no sooner?

Bankruptcy Filings

CNN/Money is reporting, “Bankruptcy Filings up Despite Reforms”:
“A new U.S. law to deter American consumers from seeking bankruptcy protection made filings plunge to a 20-year low in the first quarter of 2006, but a rapid rise in new cases since then raises questions about whether the law is working as expected.

“The 2005 bankruptcy reform law was pushed through Congress by banks and credit card companies that sought to prevent abuse by individuals trying to wipe their financial slates clean from runaway debt…

“But credit card companies and banks are keeping an eye on the recent increase in filings.

“The law took effect Oct. 17, 2005, prompting a surge of 619,322 personal bankruptcy filings for that month as debt-laden consumers rushed to court.

“New cases plunged to 13,758 in November, then rose to 21,636 in December, 27,235 in January, 35,352 in February, and 49,977 in March, according to the Administrative Office of the U.S. Courts.

“That compares to the monthly average of 130,183 new cases in 2004…

“‘We are starting to see more bankruptcies being filed. They’re taking longer, they’re more complicated,’ said Maureen Thompson, legislative director of the National Association of Consumer Bankruptcy Attorneys. ‘These numbers will continue to creep up as people face a number of economic factors.’

“Those factors include traditional ones, such as poor money management, loss of a job, medical expenses, and divorce. But some consumers are also falling behind on monthly mortgage payments as interest rates continue to rise.

“Other homeowners may be overextended with adjustable-rate mortgages, or ARMs, which could reset soon. At the end of 2005, almost a quarter of all outstanding home loans were ARMs.

“‘We’re going to start to feel those numbers this year and next,’ said Jeffry Taylor, economist at the National Association of Federal Credit Unions in Arlington, Virginia.

“More than $300 billion in ARMs are subject to interest rate resets this year, and that figure is expected to reach $1 trillion in 2007, according to DB Global Markets Research…

“Before the new law took effect, lenders such as department stores, mortgage companies, and credit card companies lost an estimated $60 billion annually due to bankruptcy filings.

“‘Bankers are monitoring the numbers very closely to ensure that the law accomplished what it was passed to accomplish,’ said Patricia Milon, senior vice president of America’s Community Bankers, a Washington trade group.

“‘Bankers feel what was passed was very balanced,’ she said. ‘There should be no backsliding.’

“The bankruptcy law also created various income tests, including a ‘means test’ to determine if an individual is eligible for Chapter 7. The test is triggered if the debtor’s monthly income is above the state median.

“Another provision requires financial counseling before a bankruptcy filing and again before debts are discharged.

“Debtors also face steeper court fees for bankruptcy filings. The fee for Chapter 7 rose to $299 from $274, while the Chapter 13 fee increased to $274 from $189.”
“Bankers feel what was passed was very balanced.” Of course they do. With the help of their paid lobbyists, they wrote the bill. It contained 100% of what the credit industry wanted and 0% of what they did not want. All in all, it was perfectly balanced.

Let’s report the Bankruptcy Reform Act of 2005 for exactly what it was: an attempt to make the poor and insolvent debt slaves forever.

The credit card industry wanted protection for their predatory lending practices, no interest rate caps, no fee caps, high interest rates, the ability to change terms at whim, a means test, and guaranteed payments. They got it all. How could the bill possibly have been more “balanced”?

Some people blame consumers for getting into trouble with debt. Is it really that simple? I think not. Here is the Mish vision of the credit card business (and most of the mortgage loan industry as well):

Day in and day out, those industries put a glass of vodka in front of an alcoholic while at the same time reminding the alcoholic how good the drink tastes. When the alcoholic goes on a binge, the credit industry wants to jack up the price of vodka and then blame the customer for the problem.

Now, from Bernanke’s point of view, none of this is a problem “on average,” at least since last October. Unfortunately, Bernanke fails to understand the effects of that mad rush where 600% of normal filings took place in a single month. That blast took away from future demand. It will not be too much longer before housing prices tank (for good) and those filings skyrocket once again. I suspect that Bernanke will have a vastly different view of those averages in the not-too-distant future.

Mike Shedlock ~ “Mish”
June 15, 2006