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Commentary

Americans Are Not Deleveraging (Yet)

A guest post at Naked Capitalism talks about how American consumers are actually spending, not deleveraging.

  • 6 million homeowners are not paying their mortgages, and the $8 billion in cash thus freed per month is being spent.
  • The rest of them aren’t cutting down debt on their own – their banks are cutting it for them. Of the $610 billion in reduced household debt, $588 bn is a result of post-default write-downs!
  • The equity portion of real estate has fallen (due to falling prices) by half – but household debt is still at about the $12 trillion levels, not very different. In that sense leverage has gone up.
  • The overhang of debt and the banking system is slowly being transferred to the government (read: taxpayers), which is why deleveraging is simply not happening.

America has become dependent on debt, so much that it seems they can’t imagine life without it. For instance, in an Obama show on CNBC yesterday, there was a question about “what changes have you made?” – his reply was that if your kids need student loans we have kept them cheap, if you need credit cards, we keep them honest, if you need mortgage loans we make sure you continue to get the best deals. All about making sure people still get access to cheap debt; on the back of a crisis that was caused by cheap money.

We’re not in much better shape over in India – a lot of our economy is also debt, but a large chunk is not institutionalised – i.e. from friends, family, local moneylenders, gold backed borrowing and so on. Institutional lending has been easily available to people who don’t really need the money – large corporates, IPO financing and credit cards for the rich – and very difficult for those who really do, like the local shop owner, or a driver that needs a motorbike to commute, or a low-income household for their kid’s education. In a way, the Obama processes may make sense to people here, but honestly there is only talk and no real appetite to expand credit to where it’s really needed. Why? Because we can’t think about double digit NPAs in a highly leveraged system (i.e. if you can lever your money 10x, you can’t have 10% losses on your exposure, it wipes you out). And double digit NPAs will happen – because if you expand credit the unscrupulous people will find ways to grab the money and run, far earlier than the actually credit-deserving people understand their newly available access. There are no easy answers, though; the status quo will not be disturbed unless there is a shakedown, and there will be a shakedown from an area we least expect.

Going back to the US, read about nearly 7 million houses that aren’t currently in the market – the “shadow inventory”. That’s a lot of houses. They won’t all come on to the market at the same time, but they’ll keep prices from going up too much – as prices come, the houses will be listed. A large lender, GMAC, has stopped its foreclosure process because of a technical problem with the process (they’re not sure they can claim ownership of the mortgage with current paperwork,  and have perhaps filed false affidavits to foreclose) and the discussion is getting more and more interesting. If there’s a problem with ownership paper-trails, foreclosures might be stopped for longer, and the shadow inventory will only build up. Meanwhile, living rent-free is the in-thing, I imagine.

  • Anonymous says:

    >When interest rates are so low why not borrow more if you have not defaulted in the past on any loan and your credit score is high. As for charge offs (NPA written off the books of banks) pass it on to tax payers. So those who defaulted or walked away from their homes, cars, Education, personal loans there seems to be no penalty in US. May be they should thank China and Asia and the Fed for providing them with cheap loans and are ready to accept their unscrupulous behaviour.

    MK

  • Wally says:

    >They cant deleverage that fast, can they? It took quite some time to lever up, de-levering has to be a slow and painful process. ( if it was easy, the markets would not get spooked).

    In India, there will and can never a shakeout, under current regulations. You have bad debt, you restructure, sell and do whatever it takes to get the money back, one does not need to write down that fast

    Credit reaching is a different problem actually, what if they just take the money and bolt. No unique identification, porous borders? Unless there is a social pressure why lend to them at all. (social pressure is the lending angle for shriram transport etc and the microfin guys) Thats why the national id project is so important, inclusive unique identity (credit history whatever one may want to call).

    But we are better off without a credit spiral no?

  • Hemant says:

    >It some time looks that govt. has give more freedom to our banks – when interest rate increases they increase rate on loan but no vice versa.
    They are minting money like anything.

  • Antra says:

    >Thanks for sharing this useful infomation.