Thursday, November 08, 2007

The Chickens are Coming Home To Roost

The news over the last couple of days has been interesting, and is summarized by a comment in this week's Economist (not an exact quote): According to bankers, the four most expensive words in the English language are, "This time it's different."

Let's start with the bankers. Over the last couple of weeks everybody's 3rd quarter report has come out, and the red ink looks like the floor of a slaughterhouse. The chairmen of Merrill Lynch and Citigroup have been bounced. (Don't weep for them; they won't starve.) Citigroup in fact is in such bad shape that people are beginning to wonder whether the guvmint will have to bail it out (which probably means it's too late to sell my stock, fortunately not a large stake). As I commented in September, the investment banking industry thought it had invented a way to manage mortgage lending without actually personally taking any risk that the borrower would default; and they were wrong.

The fallout isn't restricted to bankers, and the bankers haven't heard the worst yet, because most of them are also in the credit card business. The fallout from subprime delinquencies is about to hit the credit card business, according to an analysis Tuesday from AP. The same people who took out mortgages they couldn't pay were carrying credit card debt they couldn't pay. In fact, some of those adjustable mortgages were refinances to pull out cash to pay off other debt... The whole industry is now watching nervously to see what The Consumer does during the upcoming Christmas season.

How does this come under "This time it's different"? Back to the subprime crisis: this time it was different because the housing market would continue to rise indefinitely and everybody would be rich because of their house. Except it didn't. This time it's different because for 40 years consumers in this country have been running their lives on credit and the bills have never come due - there was always another credit card, or you could refinance the house and "cash out" because the housing market was always going to keep rising. (Except in 1989 but nobody remembers that.)

If I sound a little sanctimonious here, I'll admit that, at one time in my life, almost 30 years ago, I ran on credit. My paycheck was never quite enough, and I had I think 7 or 8 credit cards with balances on all of them. But - I got a small windfall, and I used the windfall to pay off all my credit cards, and I've never put anything on a credit card since that I couldn't pay off at the end of the month. The only debt we have is a mortgage and we'll pay that off shortly. I'm back to where my parents were except that they didn't have a mortgage; they paid their house off in 1952. So I'm watching this from the outside; but I live here, and if we have a major recession it'll hit me too.

I've been wondering for years when this was all going to fall over, and I have a bad feeling that it's about to. And you know something? If it falls over, we'll have done it to ourselves. We made the choices. We decided we could pay for it later. Well, folks - it's later.


  1. There are a great many things coming due.

    Balance of payments.

    National debt.

    Credit crisis.

    Loss of middle-class jobs, esp. in manufacturing.

    Pension erosion.

    Health care uninsured.

    Crumbling infrastructure.

    The imminent fall of commercial airlines and railroad industries.

    Spoiling of the environment.

    Exhaution of resource, esp. of water resource.


    Religious extremism.


    Take your pick. Ich nicht optimistish.

  2. Anonymous3:15 PM

    And now we have no infrastructure, no industrial base, no nothing substantive, at least nothing to brag about, and I'm not altogether certain all that many Americans have the kind of resilience or personal fortitude that has gotten us out of previous debacles, nor do we yet have enough voters who seem to get it in any larger sense - but that is the one thing that could change, albeit quite painfully. But on what essential America would a new FDR draw?

    Are the young simply going to have to re-invent America?

    Anonymous David