Running on fumes: Tapping credit cards and 401(k)s
As Bill Bonner noted in yesterday’s DR, a consumer society inevitably shrinks when consumers stop consuming. And this morning, it seems clear that while consumers are still cruising along, they’re running on fumes.
Credit bureau analyses of consumer payment data show that financially
squeezed borrowers have begun paying their credit card and car bills
before their mortgages. That’s a striking reversal from the norm, one
that reflects rising desperation. It suggests that some people
essentially have given up trying to stay current with their mortgages
and instead are focused on using credit cards to squeak by…
And an increasing percentage of those credit card purchases are for necessities — food, heat, transportation. The house payment has become expendable:
“A lot of people are exhibiting a kind of fatalistic behavior to their
mortgages,” says Douglas Hammond, outreach programs director at
Alliance Credit Counseling. “They can’t make their mortgage payment, so
why (try to) make it at all? ‘Let’s keep my car, make my payment on my
credit card, so I have some way of feeding my family.’ “
For those who don’t want to — or can’t — resort to plastic, there’s always the good ol’ 401(k).
Eighteen percent of workers had a loan outstanding from their
retirement plan in 2007, up from 11% in 2006, according to a survey to
be released today by the Transamerica Center for Retirement Studies, a
nonprofit corporation funded by Aegon NV’s Transamerica Life Insurance Co.
Never mind that a 401(k) loan wrecks the compounding that ultimately builds up a retirement nest egg. Never mind that a 401(k) loan must be paid back immediately if you lose your job. And never mind that if you don’t pay it back under that circumstance, you’re immediately hit up for taxes and a 10% early withdrawal penalty.
In the Transamerica study, which surveyed more than
2,000 full-time employees at for-profit companies, 49% of those who
borrowed from their retirement savings said they took the loan to pay
off debt, up from 27% in 2006.
In some instances, workers in fear of home foreclosure
may be tapping retirement funds as a last-ditch measure, says Anne
Lester, a senior portfolio manager at J.P. Morgan Asset Management. “We
found a strong correlation between parts of the country where
foreclosure rates were high and there was a rise in 401(k) loans or
hardship withdrawals,” she says. In the South Atlantic, Midwest and
Southwest regions — areas that have seen the highest increase in
foreclosure rates — more than half of company 401(k) plans experienced
an increase in loans and withdrawals since 2006.
So it’s come to this: People who want to hang onto their homes are tapping their 401(k)s, while people who are upside-down on their homes and don’t much care about losing them (oh, there’s a big establishment media article on that today, too) are tapping their credit cards.
What a fine mess. And Bernanke and Bush, that dynamic duo of monetary and fiscal excess, say there’s no recession. But then, Bush isn’t even aware of the mainstream experts predicting $4 gas this year. (Doesn’t he have aides who check in with Drudge to keep him abreast of basic water-cooler stuff that are on the minds of his subjects? Or is he in such a state of lame-duckitude that he doesn’t even care?)