Another Credit Crisis

The next shoe to drop… credit cards?

By the time this is all over, another 14% of the $1.9 trillion U.S. consumer debt market will default, the IMF predicted over the weekend. That’s another $266 billion in coming losses for American mega banks. The IMF (not known for their worst-case scenario forecasts) expects $172 billion in similarly soured loans in Europe.

Of those bad consumer loans, credit card defaults are rising fast. Credit card charge-offs, loans that banks don’t expect to ever be repaid, have risen to a record 10.7%. Moody’s, the steward of this particular data, says charge-offs will continue to rise until unemployment begins to abate. By their estimate, joblessness will peak at 10% next year and credit card charge-offs will top 13%… both rosy projections.

And in terms of total soared bank loans, we’re already in uncharted territory. By the St. Louis Fed’s best guess, charged-off loans already account for 2% of the total loan assets of U.S. banks… a record high that’s still soaring into the stratosphere:

The above chart includes commercial loans, another potential “next shoe to drop.” We can’t forecast today which one might come first, or which will hurt more, but it’s starting to seem obvious…the same way subprime loans led us into the first leg of this mess, other varieties of easy-money-gone-wrong will likely lead us into the next.

“The big banks are most profitable when speculation is rampant and debt is growing,” Bill Bonner said Friday. As usual, Bill was the final speaker at our annual Investment Symposium. “That is, when people are going further and further into debt… and speculating on rising asset prices. We know you don’t really prosper by borrowing and gambling. But that doesn’t make casinos unpopular, or lenders unlawful. Bankers, like undertakers, benefit from human frailty. At least, they benefit as long as the government bails them out. Otherwise, they fall victim to their own human frailty.

“But this is a minority opinion. Most economists disagree with us. And there are so many of them… if all the economists who disagreed with us were laid end to end… it would be a good thing. They believe that the economy is stabilizing… and on its way back to normal. Trouble is ‘normal’ ain’t what it used to be.

“Wall Street banks are making money, ’tis true. But they’re not financing new businesses… or factories. They’re not aiding the process of capital formation nor allocating capital in ways that will result in new jobs and new industries. Instead, they are refinancing old debts… and speculating on zombie assets. This will not increase the real wealth of the planet. Instead, money just changes pockets. Which, of course, raises an interesting question: Where did all this money come from?

“My guess is… from you.”