THIS IS THE NEXT SHOE TO DROP....
FOLLOWED BY THE COLLAPSE OF THE 401-k scheme..
and finally..Social Security..
http://www.chicagotribune.com/business/chi-thu-credit-problems-sep11,0,2948320.storyConsumer debt defaults looming large
As more Americans lose jobs, credit cards, loans won't be paid
By Rachel Beck | Associated Press
September 11, 2008
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The latest data on the job market paint an ugly picture: The unemployment rate shot to a five-year high in August, and payrolls are being cut at an alarming rate. With more people out of work, that likely means many are having a tougher time paying their bills. If that leads to a surge in defaults on debt assets beyond just mortgages, such as credit cards, auto loans and more, we can forget about the credit crisis being over any time soon. That's something to remember amid all the news regarding the Treasury Department's takeover of Fannie and Freddie. The mortgage giants, which own or guarantee about $5 trillion in home loans, or about half of the nation's total, have been ailing for months as mortgage default rates have soared and their capital base has been constrained.
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The government is trying to prevent further deterioration in the mortgage market, but it hasn't done much to ease other credit troubles.
"There is no silver bullet here. This is certainly a positive step but is not the absolute answer," said Mark Zandi, chief economist at Moody's Economy.com. "They've made progress in residential mortgage assets but have yet to deal with other problematic loans." What's worrisome is whether growing stress in other areas of credit leads to more big losses and write-downs at banks and other financial institutions in the months ahead. Of particular concern is what happens with the more than $2 trillion in consumer debt. That may be a fraction of the more than $12 trillion in residential mortgage loans, said Zandi, but it still is large, comparable with all the goods and services produced by France in 2007. Americans this year have been increasingly using their credit cards to make purchases. Banks have tightened lending standards on such things has home equity loans, which consumers used heavily in recent years to finance spending. New data from the Federal Reserve show that consumer borrowing on credit cards grew at an annual rate of 4.8 percent in July, up from a growth rate of 3.5 percent in June. But as credit card use has surged, payments on those cards have fallen, even though $106.7 billion flowed into Americans' wallets in recent months from the U.S. economic stimulus package. Card payment rates fell 6.2 percent on a year-over-year basis in July, the ninth consecutive monthly decline. That's the second-biggest pullback in the records kept by the banking analysts at Oppenheimer & Co., behind March's year-over-year decline of 7.4 percent.
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According to the Labor Department, the jobless rate rose to 6.1 percent in August from 5.7 percent in July, and employers cut their payrolls by 84,000 in August, the eighth consecutive month of declines. That pullback was fueled by employers' worries about the economy and their own business prospects. So far this year, 605,000 jobs have vanished. The economy needs to generate more than 100,000 new jobs a month for employment to remain stable. "Rising joblessness of the magnitude we saw in the August employment report means that more households, including good-quality prime borrowers with solid credit histories, will likely be encountering more difficulties meeting their debt obligations," said David Rosenberg, chief North American economist at Merrill Lynch. Research by Merrill's economics team found that there is a tight historical link between the unemployment rate and consumer credit card delinquencies.
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The losses might not begin to intensify until 2009, because there is a lag between when someone is out of work and when loan defaults begin. So while the U.S. government focuses its attention on the mortgage mess, another storm is brewing. And don't count on a quick fix.
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