Bad times are coming.Americans are in debt up to their eyeballs.
Take a look at the chart to the left to see just how much debt levels have increased since the beginning of 2000 (let alone since the 1950's and 1960's!)
For a while now I have been saying that individual and public debt levels in America are at scary levels that cannot be maintained much longer without some serious consequences.
Reaganomics and Bushonomics helped the top 5% (let's call them the "Haves") make tons more money in the past 25 years, but the other 95% (let's call them the "Have Debts") have seen little benefit from trickle-down economics and the Bush tax cuts.
In fact, the bottom 95% are now worse off in 2008, adjusted for inflation, than they were back in 2001 when President Bush first took office.
So the "Have Debts" have resorted to borrowing to maintain lifestyles that could no longer be financed by their squeezed wages or their outsourced jobs. Increased health care, housing, education, food and energy costs have further squeezed the "Have Debts" (although the Greenspan-created Housing Bubble enabled them to survive a little while longer before the implosion...more on that in a minute.)
Times would have been tough, but the "Have Debts," encouraged by Uncle Alan Greenspan and the Federal Reserve and the president and the media (owned by multi-national corporations with huge stakes in financial institutions) and a bunch of other shills for the credit card companies and banking industry, encouraged people to buy houses (even if they couldn't afford them), encouraged people who already owned homes to refinance them for vacations, home improvements and other consumer spending, and encouraged Americans to do their "patriotic duty" and buy, buy, buy after 9/11, even if all this buying was being done on credit with money people didn't actually have.
The fact that Uncle Alan decreased interest rates to historic lows and kept them there for a very long period of time, further encouraging spending and discouraging saving, helped people to continue on their spendthrift course.
It worked for a while, of course. As long as real estate values continued to inflate, people could continue to tap into their home equity for ready cash or could buy homes, wait six months for them to increase ridiculously in value, and "flip them" to other sellers looking to cash in on the housing market themselves.
The banks played a role, lending to just about anybody with a pulse (my favorite loan product was the NINJA loan - this stands for NO INCOME, NO JOB, NO ASSETS...NO PROBLEM, HERE'S YOUR LOAN!!!), Wall Street investors played a role by buying up all these mortgages after they had been bundled up into CDO's and other non-transparent financial instruments and the regulatory bodies like the ratings agencies and the federal government played a role by turning a blind eye to all the fraud and insanity and calling it "financial innovation."
Now, with real estate values plunging across the country and many of the mortgages made in the last three years going bad, with credit card late payments and defaults increasing, with financial stocks tanking and mortgage companies going belly-up as a result of the bursting of the housing bubble, people are starting to wonder if Uncle Alan Greenspan and the president and the financial companies weren't completely insane for encouraging all this debt.
Only it's kinda too late to do anything about the problem. You see, all that borrowed money has already been spent and it's starting to look like the only way people can continue to make payments on their debt is if they can borrow more money.
Which, due to the credit crisis, tightening lending standards, and falling home prices, they mostly can't.
So, the storm created by Uncle Alan and the banks and the rating agencies and the federal government and the news media and the people who borrowed all that money and now can't pay it back is here.
Amex took a $440 million writedown in the fourth quarter because of credit card defaults. Amex stock fell 11% yesterday and other credit card companies also took a hit as investors fear consumers will continue to default on their credit card bills.
Capital One also cut its profit outlook on Thursday because of default problems.
Countrywide Financial, the nation's largest mortgage lender, was about to go belly-up until Bank of America, perhaps urged by Secretary of the Treasury Hank Paulson, purchased the company that many people feel ushered in the era of lax lending and fraudulent mortgage practices in the first place.
Other financial companies like Merrill Lynch and Citigroup are selling parts of themselves to foreign governments like China to shore up their books after taking record losses from the mortgage mess.
According to the Washington Post, Merrill Lynch, Citigroup, UBS, Morgan Stanley and Bear Stearns have gotten about $30 billion from sovereign wealth funds. Merrill and Citigroup are set to get another $14 billion. With additional write-downs expected as a result of mortgage losses, credit card and auto loan defaults, (Merrill is expected to write down a total of $15 billion, Citigroup as much as $24 billion), problems with these financial institutions are nowhere near over.
And then there is the job market. Citigroup is rumored to be cutting somewhere between 5%-10% of its workforce (between 17,000 and 34,000 employees) in the coming months. If recession fears turn out to be accurate, firms from Main Street to Wall Street will be laying off tons of people and curtailing spending to weather the storm.
Since 72% of the American economy is powered by consumer spending, when Americans cannot or will not do their "patriotic duty" and go shopping, economic problems will grow even worse. Americans with record debt levels and no jobs will probably not be able to do their patriotic duties and spend, spend, spend.
The Fed will do its part, of course, and try and lower interest rates back to Greenspan levels. Indeed, Uncle Ben Bernanke said Thursday that he is ready to get up into his helicopter and shower the U.S. economy with as much cheap money as it wants or needs. The problem is that food and energy inflation is already so high (oil hovers between $90-$100 a barrel, soybeans and corn hit all-time highs again this week, gold hit $900.10 an ounce this week) that the Federal Reserve risks stoking 70's style inflation if it prints too much money.
We're in a heap of trouble and Uncle Ben and President Bush and the shills on Wall Street know it. The financial markets have suffered their worst start to a year in 20 years. According to Jack Ablin, chief investment officer at Harris Private Bank, "From an earnings perspective, we're already in recession." The housing market hasn't been this awful since The Great Depression, as home prices and values continue to decline month after month across the country while inventories continue to grow. Manufacturing declined last month for the first time since 2003 while job creation fell to 18,000. Local governments and even state governments like California are facing huge shortfalls and looking to cut millions/billions of dollars in spending. New York City faces a $3.1 billion shortfall in the coming fiscal year and Mayor Bloomberg has said he is open to tax hikes and drastic budget cuts to make ends meet. If stocks continue to tank and Wall Street layoffs are larger than expected, New York City will face even larger budget problems in the near-term.
Scary times, and while it's true that one month does not make a trend, the direction for the U.S. economy seems pretty clear.
The financial excesses of the last decade will have to be paid for. The hangover cannot be put off anymore.
Bad times are coming.
The "Haves" will no doubt weather the storm like they always do.
As for the "Have Debts", I have a feeling that things are going to be really, really bad for awhile.
I hope I'm wrong.
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