Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20
Global "Debt Mountain": Beware of This "New Peak" - 13th Nov 20
Overclocking Zen 3 Ryzen 5600x, 5800x, 5900x and 5950x to 4.7ghz All Cores Cinebench R20 Scores - 13th Nov 20
Is Silver Leading Bitcoin or is Bitcoin Leading Silver? - 13th Nov 20
How Elliott Waves Simplify Your Technical Analysis - 13th Nov 20
How to buy Bitcoins using debit/credit card? - 13th Nov 20
Will COVID Vaccine Kill Gold and Silver? - 12th Nov 20
Access to Critical Market Reports - 12th Nov 20
Stock Market Dow Futures Reach 30,000 on News of COVID-19 Vaccine Trials Success - 12th Nov 20
8 Terms & Conditions You Must Know Before Asking For Life Insurance Policy Quotes - 12th Nov 20
Gold Stocks Post 2020 US Election Outlook - 11th Nov 20
Champions’ League Group Stage Draw: All You Need To Know - 11th Nov 20
Stock Market Secular Trend - 11th Nov 20
Stock Market Correction Curtailed by US Election - 11th Nov 20
What Causes a Financial Bubble? - 11th Nov 20
Ryzen 9 5900X RTX 3080 - Scan.co.uk vs Overclockers.co.uk UK Custom PC System Builder Review - 10th Nov 20
Killing Driveway Weeds FAST with a Pressure Washer - Saving Block Paving from LOTS of WEEDs - 10th Nov 20
Trump Fired, Biden Hired, What Next?  - 10th Nov 20
Looking for a Personal Loan? Here Is What You Have To Know  - 10th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Credit Crunch Time for American Consumers

Economics / Credit Crunch Dec 28, 2007 - 12:12 AM GMT

By: Peter_Schiff

Economics Best Financial Markets Analysis ArticleThe subprime mortgage crisis is merely the tip of a very large iceberg. Beneath the surface lies not only a sea of tenuous loans to prime borrowers, but also an assortment of other liabilities backed by auto loans and credit card debit. Now that home equity extractions, "zero percent auto financing" and "zero interest" credit card rollovers are much harder to come by, Americans must do without the credit lifelines that have previously kept them afloat.


Similar to the home buying market, lax lending standards in the automobile marketplace have led to gross distortions that must be painfully corrected. For years standard practice allowed millions of car buyers to trade in old cars (that were worth less then outstanding loans), and roll the balances into new low interest rate loans for new cars. Although these "E-Z" financing terms allowed many over-stretched buyers to stay current on their debts, and vendors to move bloated inventories, they immediately saddled lenders with loans that far exceeded the value of the collateral. Such a situation encourages defaults and is toxic to lenders. Vendor financing (especially with publicly traded companies focused on short-term results) compounded the problem as conflicts of interest encouraged lenders to sweep these problems under the rug.

The same phenomena also occurred with credit cards. For years, low short-term interest rates and low defaults encouraged banks to aggressively seek new customers. The competition became so intense that balance transfer wars enabled debtors to constantly stay one step ahead of default by transferring their balances to new issuers who often permitted low, or zero, interest for up to six months. When the teaser periods expired there was always another card company willing to accept a balance transfer on similarly friendly terms.

For a while at least, this high wire lending act in the auto and credit card sectors was kept aloft by repeated waves of mortgage refis in which extracted home equity was used to consolidate other consumer debts. By turning higher interest rate, non-tax-deductible consumer debt into lower rate, tax deductible mortgage debt, consumers were able to temporarily manage their debts. In addition, since home equity extractions often exceeded the amounts of other debts, the extra cash in homeowner's pockets temporarily made higher mortgage payments more affordable. Plus with their credit cards paid off, card holders were not only free to run their balances back up again, but their improved credit scores resulted in even more credit card offers.

Because defaults were low, bonds backed by auto loans and credit card debt were rated AAA, allowing Wall Street to easily package the debt for investors.  However this is all coming to an end. Lenders, burned by subprime losses are cutting back. The home equity ATM has been shutdown and credit card and auto loan delinquencies are already at record highs. In fact, to make up for losses, credit card companies have been raising their rates, thus compounding the problems for those struggling to pay. Auto lenders will no longer allow potential buyers to roll their negative auto equity into new loans.

It was inevitable that all of this debt would eventually catch up to us. Americans are now so upside down on their auto loans that new car sales will collapse; and when many loans go sour lien holders will be stuck with substantial losses on repossessed vehicles. As the music finally stops for serial credit card balance transferors, the inability to renew low teaser rates means that fewer borrowers will be able to afford their payments.

As delinquencies continue to rise rating agencies will downgrade bonds backed by auto loans and credit card debt, inflicting subprime type losses on a much wider scale. As defaults increase and losses mount, credit will tighten like a noose around the neck of America 's consumer based economy. Just as subprime homebuyers are being shut out of the housing market, soon Americans will find that their credit is no longer good at car dealerships or department stores. American consumers that want to buy will need to be prepared to pay cash.

The bottom line is that a host of factors that temporarily allowed default risks to be underestimated and credit to be miss-priced have disappeared. As a result, Americans have simply borrowed more money then they can possibly repay. Ratings agencies once again missed the boat by feeding garbage data into computer models and blindly accepting what came out.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Charles York
31 Dec 07, 16:11
The Falling USA

No wonder Peter Schiff supports the policies of Presidential hopeful Ron Paul. The days of the USA living off credit and bonds sold to communist China must surely end in the near future. Hopefully the realization that the US is broke will

resonate among the electorate.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules