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Monday, December 31, 2007


2008: the return of hardship

from mish -- the increased angst of american credit card debtors has been likely fallout of the credit contraction, as many were financing large structural or revolving debts with home equity lines of credit (HELOCs). HELOCs are just second lien mortgages -- and while easily obtained for incredible amounts vis-a-vis actual home equity during the boom of 2003-2007, standards have changed.

Until recently, credit card default rates had been running close to record lows, providing one of the few profit growth areas for the nation's banks, which continue to flood Americans' mailboxes with billions of letters monthly offering easy sign-ups for new plastic.

But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans' ability to juggle growing and expensive credit card debt.

In the wake of the jump in defaults on subprime mortgage loans made to borrowers with poor credit histories, banks have been less willing to allow consumers to consolidate credit card debt into home equity loans or refinanced mortgages. That is leaving some with no option but to miss payments, economists said.

Investors also are backing away from buying securitized credit-card debt, said Moshe Orenbuch, managing director at Credit Suisse. But that probably has more to do with concerns about the overall health of the U.S. economy, he said.

"It's been getting tougher to finance any kind of structured finance - mortgages, automobile loans, credit cards, student loans," said Orenbuch, who specializes in the credit industry.

mish rightly notes that this is the onset of deflation. the federal reserve can lower short rates all it wants, but policy power over longer rates was sold to foreign central banks over the last two decades -- and in any case, rates are simply not the same as availability. it is very probably beyond the power of central banking to perpetuate this level of general indebtedness. in the end, a paradigm shift must come.

i was drawn to the year-end missive of minyan peter, whose sophisticated views of banking have been valuable all year but whose assessment of what lies ahead is probably much more profound.

I believe that in time, historians will define the last twenty years in America as the “Age of Aspiration” where, thanks to unprecedented levels of credit, Americans could become anything they wanted. Where, thanks to zero percent down debt and a seemingly robust economy, we could own bigger homes, fancier cars, and more lavish vacations – where our bounty was limited only by the boldness of our wants.

Well, I, for one, believe that our Age of Aspiration is ending. And, with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.

But I would suggest that few of us are prepared for this challenge. Why? Because abundance relieves each of us from having to prioritize what is important. When anything is possible, everything is possible. Few of us have really had to choose.

As I look ahead to 2008, though, I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained.

And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past twenty years: “I can’t afford that.”

he is describing, while avoiding the word, the return of hardship.

the united states has been, particularly under the bush administration but in general since the 1980s, a gradually bifurcating society. a relatively small number of americans have done very well indeed in building wealth, while a great many have been able to emulate (but not replicate) that material success by building debt. the two have seemed quite similar from a distance -- my wife and i have been amazed to see the kinds of homes some friends and acquaintances have bought, the kinds of cars they drive, the sorts of plans they've made, while privately understanding that they pull in less income than we do. it's been particularly hard for her at times to accept that we are not doing something wrong, that accumulating control of assets can be done in one of two manners and that the latter, impermanent fashion was becoming so widespread. we even mortgaged a condo in chicago on a 5-year ARM between 2002 and 2006, in what amounted to an effort to quell her disquiet that (fortunately, thanks to a new arrival and relocation) ended decently.

the unfolding disaster in housing, however, began to make concrete a lot of things that previously i had only been able to talk to her about in the abstract in what sometimes must have seemed to her mere excuses not to live well/excessively (depending on whose definition was being used). and as the outrageous sheer scale of american social credit profligacy is slowly comprehended, particularly as associated with housing, as aspect after aspect -- gravity-defying mortgages, strange and heady commerical development in both city and suburb, zero-interest five- and even six-year car loans, literally standardless credit card solicitation -- begins to reveal its dark underbelly as the mechanism of securitization seizes and ruptures under the duress of wild, unanticipated but equally inevitable default rates, i feel as minyan peter apparently does. the growing american bifurcation that has been papered over by debt in the last decade will now be rendered plain, and the haves will be remorselessly sorted and separated from the have-nots.

much of what has transpired so far has been concentrated in the financial and real estate sectors of american and european economies. it is spilling over into statehouses, as has been previously discussed in association with the monolines. it will this year sincerely overspill into the daily lives of most americans -- the scale of the problem is simply too large for any kind of real compartmentalizing, as has been seen in the joke made of the word "contained" in 2007. as such, i expect that this coming year will be remembered for its difficulty more than anything else.

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