I received an interesting article this morning from Michael White called Debt Man Walking. It is a rebuttal by White of this Seeking Alpha article entitled There’s Still No Household Debt Crisis. The Seeking Alpha article states:
I’ve shown this chart several times now, and each time it elicits strong protests from readers. This update features data for the first quarter of this year that was released by the Fed last week. Note that this chart compares debt-related payments by households relative to disposable income. As such, it properly measures households’ debt service burdens. (Comparing outstanding debt to income would show a rising trend, but that is misleading since it compares the stock of debt to the flow of income.)
One point I have been making is still very much valid: household debt service burdens have not increased materially for a number of years, so there is no obvious reason to think that we are now in some brand new era in which households will be behaving differently than they have in the past. Indeed, as the dotted green line shows, debt burdens today are almost identical to what they were at the end of the 2001 recession, and not a whole lot higher (only 4%) than they were in 1987.
White repudiates this theory:
The White Hypothesis says we are a country with perhaps 20% of our households heavily overleveraged. Their failed-gold-rush balance sheet will lead to unprecedented mortgage and credit card defaults. The defaults lie immediately ahead and behind us. The mistake in the Grannis Hypothesis is believing that the average bill payer defines the crisis. It is the defaulting bill payer who defines the crisis. How many bill payers will default?
White’s question is central to determining the fate of the housing and financial markets. Lenders are so highly leveraged the fact that "most people are still paying their mortgage and bills" does not save the markets from catastrophe. White states:
My forecast for financials and the economy range between very bad and death-by-bus. It is the defaulters who will define the losses, and their fate is not accurately represented in the Grannis Chart, or in the property-equity chart. I estimate for every dollar of at-risk mortgage debt there is 50 cents of real estate.
The bill payers who hold preponderant influence for the fate of financials and the economy are not those with no mortgage and no credit cards.
The well-off possess great equity. They easily manage their monthly payments. Their very modest bills prove the Grannis debt-payment-to-income chart accurate. My guess is Mr. Grannis and his friends reside above the 90 percentile level in this chart.
Nevertheless, our world also has unhappy consumers who cannot pay their bills. Foreclosures prove it. The fall in property values proves it.
Property values have fallen 30%. This loss is not based upon a new interest in the great outdoors and a preference for life in tents. It is based upon the issuance of bad debt to insolvent borrowers who have been or will be or are in a debt crisis.
Banks issued mortgages to borrowers who began a personal debt-crisis the day they closed on their loan. Multiply this act by millions and millions and you have a property market whose values will soar and then crash.
So where does White think we are headed?
We have had a major financial crisis. I believe it is based upon the wildest debt bubble in the history of man and money. The crisis is not over. The property market has already far surpassed the Great Depression in its destructiveness. Wild fear may return to the markets at any time. I think it is likely. My hypothesis is that we are in the largest debt crisis ever, even if the Grannis Chart shows all is A-OK.
Consumers are the Superman default-creators of this debt crisis. And remember, because of leverage, if 10% of debt assets fail, then financial lenders, as a group, are completely broke and totally bankrupt.
Back in 2005 Alan Greenspan indicated that he did not believe that the housing market was one big bubble, but that there was "froth" in the housing market. The high amount of leverege in the system means that "froth" is deadly.
Bubble Meter
Northern Virginia Housing Bubble Fallout
Mish's Global Economic Analysis
UK House Bubble
Ohio Fraudclosure
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way off topic here, but:
http://www.cnbc.com/id/32035682
imagine that? prices WAY down and inventory is movin like 2005. but c’mon now…bidding wars?? definitely a “sugar high!”
What matters is, who is working? I’m afraid for the reformers, that as long as unemployment among those who have a BA or higher, is 7.4% (its current level) that no matter who defaults, nothing will change. Is that what this is, a debate over what should be changed?
For what it’s worth, the entire system is geared toward supporting homeowners. If 15% must go so that 85% of homeowners remain homeowners, so be it. But that’s the way it is.
So wake me up when unemployment among BA or + is 40%. Until then, NOTHING will change.