Credit can't cover our cost of living anymore

WASHINGTON – You know what's coming.
Auto loans, student loans, mortgages and home equity loans – all are tough to get now and will be harder to come by for years. Lenders are expected to ration credit rather than raise interest rates. Risk is out. Cash is king.

Household debt has soared from about 45 percent of GDP in 1985 to more than 100 percent today, or $14.5 trillion – more than the total value of all the goods and services produced in the economy in the last year.

Clichés about inebriated consumers are rife: The party's over. Hangover. A return to sobriety.

There is another perspective.

"The core driver of the mortgage collapse is a 10-year trend in which consumers have seen their real wages decline, their debts increase and their savings depleted," said Greg Larkin, a consumer spending analyst with Innovest Strategic Value Advisors in New York.

"This, combined with unprecedented leverage, liquidity and fraud, is what has got us to where we are," he said.

Keeping up via credit

In other words, while income stagnated, consumers used credit to keep up with the rising cost of living. Between 2000 and 2005, the U.S. Census Bureau found that household income declined in the Dallas-Fort Worth area. It's nosed up a bit since, but not by much.

Lenders were delighted. They had plenty of money to lend and lots of investors willing to share the risk. Some of the business models for credit card companies actually relied on loan delinquencies with their late-payment penalties to boost profit, Mr. Larkin said.

As with subprime mortgages, consumers with poor credit histories were lured to credit cards with cheap interest rates and loads of fine print that ballooned rates and spanked anyone going over spending limits.

When Washington Mutual Inc., the nation's largest savings and loan, was seized by the government last month and sold to J.P. Morgan Chase, 48 percent of its credit card holders were considered subprime borrowers, Mr. Larkin said.

News Source : http://www.dallasnews.com/