Friday, February 01, 2008
[Ratings] downgrades have also left policymakers and analysts scrambling to determine what has gone so badly wrong. As this search intensifies, some economists are starting to suspect that the answer lies in a striking recent change in American household choices – a shift that could have important implications for policymakers and investors alike.
In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour. ...
The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. Moreover, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans – turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.
One possible explanation is that it has become culturally more acceptable this decade for people to abandon houses or stop paying in the hope of renegotiating their home loans. The shame that used to be associated with losing a house may, in other words, be ebbing away – particularly among homeowners who took out subprime loans in recent years, as underwriting standards were loosened. Consumers may also be rationally re-evaluating the costs that come with defaulting on different forms of debt, in the light of recent bankruptcy law reforms in America.
part of the issue may be that the economy simply isn't as strong as some data suggest and some economists believe. as mish notes today, the much maligned BLS birth/death estimate was reversed by 378,000 jobs in a revision announced with today's very weak january non-farm payroll report. the BLS may certainly have been overstating jobs created, but on a trend basis it has been falling in behind the trend earlier indicated by unemployment ratio and the philly fed report, and as hinted at by the change in aggregate weekly hours. but that of course doesn't do anything to explain the willingness to quit the mortgage before the credit card.
one should note that this is a two-way street -- even if american mortgagors by and large do muster sufficient fealty to their houses and loans, the anticipation of them not doing so will cause banks to take measures to protect themselves which will themselves deepen the deflationary calamity and take on some characteristics of a self-reinforcing prophecy.
it's no secret that personal responsibility, interconnectedness and identification with common institutional aims has been on the wane in the west -- on both sides of the civil equation. the business of institutional lending, particularly, has developed into a commodity that is managed not by intimate knowledge of counterparties and two-way character evaluation but by statistical distillations of rates of return on the one hand and presumed protections of government on the other. now, with neither impersonal evalutation holding up under scrutiny and stress, models which operate on presumptions of the old relationships still being in place are breaking down -- with fear, anger, loss and a deepening reinforcement of irony, disillusionment and defeated apathy the widespread result.
it is still too early to determine how deep this social current runs beneath the mortgage disaster. it could be that the disaffected and disengaged "homeowners" are, like the unbalanced and frenetic lenders of the boom, but the froth that must be skimmed and liquidated before we can see the milk of dedicated and responsible parties on both sides stand fast, endure and survive the return of hardship.
then again, perhaps not -- and perhaps the liquidation of a credit bubble whose roots run as far back as herbert hoover, montagu norman and benjamin strong -- and which is, after all, merely a reflection of the society that created it -- is going to run much further than anyone now dreams, with ramifications that will be as much political and social as merely economic or financial.
but what is not to be doubted is that the commodification of lending is but another aspect of the gradual death of mimesis that accompanies a long civilizational senescence. the reaction of the leadership class has been spartanism -- the increasing tendency to extort and seize mere control where actual loyalty cannot any longer be won by righteous example or convincing persuasion either within or without the limes of western civilization, a tendency which has made fascism the defining characteristic of our age. the erosion of this essential social interaction and the reactionary and inward responses of both the confused and retreating proletarian and the desperate, grasping and increasingly diluted and proletarianized patrician is both symbolic of the decay of -- and represents a further mortal threat to -- the creativity and cohesion of our society.