Esoteric Dissertations from a One-Track Mind

March 10, 2008

A Review of the Credit Crisis

Filed under: economy — Tags: , , — codesmithy @ 7:04 am

Back in November I wrote this about the credit crisis:

Basically, things aren’t adding up. I honestly don’t think we’ll know how bad things will get until February 2008. However, there still seems to be a lot of potential to go down, and an accurate picture of the situation is still elusive.

Well, February 2008 came and went, so it is worthwhile to look around and see what is going on. According to a recently released Federal Reserve report, revolving credit, made up of credit and charge cards, rose $5.5 billion to $947.4 billion in January. Why is revolving credit important? It is the credit of last resort. We expect those who are coming up a little bit short to use this line of credit to make up the difference between expenditures and income. The $5.5 billion increase represents about .6% of the total and projects a 7% increase for the year. Thankfully, the Federal Reserve has the report online so we can compare it to other years. It doesn’t represent a huge spike, but it seems to represent a continual strain that started around 2006. Given that there were already concerns back in October about consumer debt, can this rate of growth really continue?

U.S. foreclosures are soaring as borrowers give up. The central point of concern is that this isn’t even due to rate resets. People are foreclosing because they could never afford their mortgages in the first place. Many of these are prime borrowers, not sub-prime.

New foreclosures jumped to 0.83 per cent of all home loans in the fourth quarter from 0.54 per cent a year earlier. Late payments rose to a 23-year high, the organization said in a report issued yesterday.

“We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,” said Jay Brinkmann, vice-president of research and economics for the Washington-based trade group.

I wasn’t anticipating the three month lag in the financial data. It looks like it is typically three-four months behind. However, things are not looking like they’ve turned the corner, and people will feel the crunch much sooner than people like me can demonstrably prove it.

This is why it is important to listen to people carefully. Generally, there is good information out there. It just gets drowned out in the blather. Here is Peter Schiff predicting this problem as early as August 2006. Please don’t be turned off by the Ron Paul advertisement. One can agree on the facts about a problem without agreeing on the solution. Just listen to what Schiff says and what Art Laffer says. I think we know who deserves that penny now.

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