Economic Cancer Is Spreading
For months now the Mortgage Guy has been concerned about an impending recession and possibly something much worse, a depression on the scale of the 1930’s. It’s been my view that the mortgage meltdown could spread to other types of debt, namely installment loans and credit credit card debt.
Of course if this were to happen, it would be a knock out blow to the consumer and any hopes that consumer spending would help us to avoid a recession or get us out of one.
Well the cancer is spreading to other types of debt as pointed out in this Market Watch article.
“The story of this quarter is consumer loans,” said Zach Gast, an analyst at The Center for Financial Research and Analysis, a unit of RiskMetrics Group.
Until the middle of last year, consumer loan losses were held in check as house prices climbed, allowing borrowers refinance mortgages or take out home-equity loans and use the cash to pay off credit card bills and auto loans.
But as the subprime-fueled credit crisis erupted in August, such activity ground to a halt.
The consumer’s debt pressure relief valve, the cash out refinance, no longer exists. Debt balances are growing and the consumer is struggling to service that debt. There is nothing in the pockets of the consumer to fuel economic growth. Consumer spending represents 70% of gross domestic product and now it’s gone.
With consumer spending now accounting for a record 71% of our gross domestic product, it will take a whopping increase in business spending and exports to keep the U.S. economy out of recession.
With broken debt markets, it’s impossible to avoid recession and or depression. The same holds true for the U.S. banking system, which is alarmingly close to insolvency. The solution, provided by the fed, is to lower interest rates. These lower rates have no way to get into the hands of those who need or want them because the delivery system, the debt markets, isn’t functioning. Zero interest rates does no one any good if the lenders aren’t lending.
No problem can be solved until it is recognized to be a problem. Nor can a problem be solved unless it is completely understood. Joe Sixpack, industry professionals and most certainly our political leaders and regulators either don’t recognize the problem or fully understand it. This just adds to the danger at hand.
The problem is there is no confidence in the debt markets and consequently they aren’t functioning. Unless the debt markets are restored and functioning properly, we are all economically doomed.