The next financial crisis is brewing

[s0me0nesmind1]

PHILADELPHIA (Reuters) - By almost every measure, the U.S. economy is booming. But a look behind the headlines of roaring job growth and consumer spending reveals how the boom continues in large part by the poorer half of Americans fleecing their savings and piling up debt.

A Reuters analysis of U.S. household data shows that the bottom 60 percent of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened - a break with a decades-old trend where the top 40 percent had primarily fueled consumption growth.

With borrowing costs on the rise, inflation picking up and the effects of President Donald Trump’s tax cuts set to wear off, a negative shock - a further rise in gasoline prices or a jump in the cost of goods due to tariffs - could push those most vulnerable over the edge, some economists warn.

That in turn could threaten the second-longest U.S. expansion given consumption makes up 70 percent of the U.S. economy’s output.

To be sure, the housing market is far from the dangerous leverage reached in 2007 before the crash. With unemployment near its lowest since 2000 and job openings at record highs, people may also choose to work even more hours or take extra jobs rather than cut back on spending if the money gets tight.

In fact, a growing majority of Americans says they are comfortable financially, according to the Federal Reserve’s report on the economic well-being of U.S. households published in May and based on a 2017 survey.

Yet by filtering data on household finances and wages by income brackets, the Reuters analysis reveals growing financial stress among lower-income households even as their contribution to consumption and the broad economy grows.

The data shows the rise in median expenditures has outpaced before-tax income for the lower 40 percent of earners in the five years to mid-2017 while the upper half has increased its financial cushion, deepening income disparities. (Graphic: tmsnrt.rs/2LdUMBa )

It is this recovery’s paradox.

A hot job market and other signs of economic health encourage rich and poor alike to spend more, but tepid wage growth for many middle-class and lower-income Americans means they need to dip into their savings and borrow more to do that.

As a result, over the past year signs of financial fragility have been multiplying, with credit card and auto loan delinquencies on the rise and savings plumbing their lowest since 2005.

Myna Whitney, 27, a certified medical assistant at Drexel University’s gastroenterology unit in Philadelphia, experienced that firsthand.

Three years ago, confident that a steady full-time job offered enough financial security, she took out loans to buy a Honda Odyssey and a $119,000 house, where she lives with her mother and aunt.

Since then she has learned that making $16.47 an hour - more than about 40 percent of U.S. workers - was not enough.

“I was dipping into my savings account every month to just make all of the payments.” Whitney says. With her savings now down to $900 from $10,000 she budgets down to toilet paper and electricity. Cable TV and the occasional $5 Groupon movie outings are her indulgences, she says, but laughs off a question whether she dines out.

“God forbid I get a ticket, or something breaks on the car. Then it’s just more to recover from.”

DRAINING SAVINGS
Stephen Gallagher, economist at Societe Generale, says stretched finances of those in the middle dimmed the economy’s otherwise positive outlook.

“They are taking on debt that they can’t repay. A drop in savings and rise in delinquencies means you can’t support the (overall) spending,” he said. An oil or trade shock could lead to “a rather dramatic scaling back of consumption,” he added.

Some economists say that without the $1.5 trillion in tax cuts enacted in January spending, which has grown by around 3 percent a year over the past few years, could already be stalling now.


In the past, rising incomes of the upper 40 percent of earners have driven most of the consumption growth, but since 2016 consumer spending has been primarily fueled by a run-down in savings, mainly by the bottom 60 percent of earners, according to Oxford Economics.

This reflects in part better access to credit for low-income borrowers late in the economic cycle.

Yet it is the first time in two decades that lower earners made a greater contribution to spending growth for two years in a row.

“It’s generally really hard for people to cut back on expenses, or on a certain lifestyle, especially when the context of the economy is actually really positive,” said Gregory Daco, Oxford’s chief U.S. economist. “It’s essentially a weak core that makes the back of the economy a bit more susceptible to strains and potentially to breaking.”

JOBS NOT RAISES

While the Fed expects the labor market to get even hotter this year and next, policymakers have been perplexed that wages do not reflect that.

With inflation factored in, average hourly earnings dropped by a penny in May from a year ago for 80 percent of the country’s private sector workers, including those in the vast healthcare, fast food and manufacturing industries, Bureau of Labor Statistics figures show.

“It stinks,” says Jennifer Delauder, 44, who runs a medical lab at Huttonsville Correctional Center in West Virginia. In seven years her hourly wage has risen by about $2 to $14.

She took on two part-time jobs to help pay rent, utilities and a student loan. But she still sometimes trims her weekly $15 grocery budget to make ends meet, or even gathers broken fans, car parts, and lanterns to sell as scrap metal. A $2,000 hospital bill early this year wiped out her savings.

Even so, Delauder, a grandmother, recently signed papers for a mortgage of up to $150,000 on a house. “I’m paying rent for a house. I might as well pay for a house that I own,” she said.

Hourly wages for lower- and middle-income workers rose just over 2 percent in the year to March 2017, compared with about 4 percent for those near the top and bottom, while spending jumped by roughly 8 percent.

That reflects both higher costs of essentials such as rent, prescription drugs and college tuition but also some increased discretionary spending, for example at restaurants.

Economists say one symptom of financial strain was last year’s spike in serious delinquencies on U.S. credit card debt, which many poorer households use as a stop-gap measure. The $815-billion market is not big enough to rattle Wall Street, but could be an early sign of stress that might spread to other debt as the Fed continues its gradual policy tightening.

More borrowers have also been falling behind on auto loans, which helped bring leverage on non-mortgage household debt to a record high in the first quarter of this year.

While painting a broadly positive picture, the Fed’s well-being survey also noted that one in four adults feared they could not cover an emergency $400 expense and one in five struggled with monthly bills. This month the central bank reported to Congress that rising delinquencies among riskier borrowers represented “pockets of stress.”

That many Americans lack any financial safety net remains a concern, New York Fed President John Williams told Reuters in an interview last month. “Even though the overall picture is pretty good, pretty solid, or strong,” he said, “this is a problem that continues to hang over half of our country.”

https://www.reuters.com/article/us-...ottom-half-bolsters-u-s-economy-idUSKBN1KD0EM

Looks like our next looming debt crisis will be via credit cards, student loan debt, car loans, and medical bills instead of

Ultimately as far as fault, I believe this is partly on our shit education for not teaching finances 101. The main woman in this story basically got a big-girl job for the first time at ~$16/hour

But getting a big-girl job doesn't entitle you to a new car and a home. It just doesn't. Even if it did, the very least you should have done PRIOR to purchases is do a simple calculation of what your monthly costs will be. It isn't that difficult. It isn't the job of the economy to nanny your dollars - hence our freedom to spend how we please.

I don't feel like other americans should have to pick up your slack and bail you out because you made ill-informed decisions. In my personal case, I didn't go to a University - or an overpriced for profit school initially. I went to community college and stamped out as much credits as I could for mere pennies vs. what a university would charge. On top of that - I've yet to buy a new car in my life. Ever. Depreciation 101 tells you how cheap you can buy an affordable and reliable car for 1/3rd the price of what it was new.

 

[vi edit]

You blame the person. Why not blame the lenders that enable it?

 

[s0me0nesmind1]

You blame the person. Why not blame the lenders that enable it?

They do their due diligence - credit checks, verification of income and such... Are they supposed to have access to all of your life choices ? That seems a bit unreasonable and impossible. How are they supposed to know if you spend $50/week on a drug addiction or something?

I will blame lenders - in the case of things like our housing crisis where they did not do their due diligence...

 

[whm1974]

People should learn to live within their means. And avoid borrowing money for unneeded things.

 

[vi edit]

In this same article she was approved for a car (of unknown costs) and a $119,000 house. On a $16 an hour salary.
It shouldn't take much mental math for a credit agency and lender to go "Oh, this income to debt ratio is bad" and deny the loan. It has nothing to do with drugs or whatever else. It's three numbers.

 

[brycejones]

They do their due diligence - credit checks, verification of income and such... Are they supposed to have access to all of your life choices ? That seems a bit unreasonable and impossible. How are they supposed to know if you spend $50/week on a drug addiction or something?

I will blame lenders - in the case of things like our housing crisis where they did not do their due diligence...

I would assume based on your freak out about this one woman that her major life decisions on their own would make her a poor candidate for additional lending. Through her credit history they do have access to at least how much her recurring debt payments are, what she still owes, and I'm assuming on the finance application other information such as her monthly rent. $32K a year doesn't leave a lot of wiggle room so it shouldn't take much in monthly debt payments on her part to trigger additional reviews or out right rejection.

What I assume is happening to some degree though is her debts are being securitized and the lenders have no incentive in the short term to ensure they are making sound lending decisions because the ultimate failure won't be on their balance sheets.

 

[Jaskalas]

I don't feel like other americans should have to pick up your slack and bail you out because you made ill-informed decisions

Define bailing them out.

From where I see it, helping the poor means helping our economy. It means avoiding civil unrest by NOT telling the starving masses to eat cake. It is a huge benefit to society if we actually invested in and took care of our own. A fully funded social safety net means less crime, less violence, less stress. Or would you rather shoot people as they come for your food and possessions?

And mind you, these people work as hard as employers will allow them. For poor part time wages that don't cover the cost of living.

These people are not on an island unto themselves. There are no mythical bootstraps to save them. They are consumers in OUR economy and their welfare is OUR concern as we're all in this together. You can't just cross them off and be done with it. Their pain becomes our pain. Instead of being selfish we should work together to make this country a better place. And that means we help one another.

Do you understand why they need help?

Because with trickle down and the GAP between productivity and wages these workers should be making $21 an hour, but instead they start off at $7. So they don't make !@#$ compared to their parents and grandparents. The older generation doesn't have a clue how much wealth has been taken from the working class if they think FYGM is a sufficient attitude to have. Don't let their ignorance cloud your judgement. Our fellow Americans are in pain and it is NOT their fault. Capitalism is simply evolving to eliminate labor, one dollar and one hour at a time.

 

[vi edit]

What I assume is happening to some degree though is her debts are being securitized and the lenders have no incentive in the short term to ensure they are making sound lending decisions because the ultimate failure won't be on their balance sheets.

Yup. Close the deal. Take the commission. Sell the shitty debt to some other company and let them deal with it.

 

[brycejones]

In this same article she was approved for a car (of unknown costs) and a $119,000 house. On a $16 an hour salary.
It shouldn't take much mental math for a credit agency and lender to go "Oh, this income to debt ratio is bad" and deny the loan. It has nothing to do with drugs or whatever else. It's three numbers.

If she qualifies for a decent mortgage rate her P&I on that house is less than $600 a month so it doesn't seem out of whack. I paid about that per month for my first house on a lot less than $16 an hour.

 

[s0me0nesmind1]

You blame the person. Why not blame the lenders that enable it?

Also - I didn't blame it just on the person, I blame it on our crappy education as well. Finance 101 will tell someone that these are bad decisions. At the same time, If you're going into something like applying for loans, I feel that anyone jumping into something that important should have the initiative within themselves to better understand what they are signing.

I don't believe the lender should always be at fault - and frankly, it's a bit over the top to suggest such. Lenders DO their due diligence as I said, but are they able to see these? Cell phone bills, cable bills, grocery bills, gas bills, electric bills, drug money, prescription costs, medical debt that isn't in collections, etc? AFAIK - most of those aren't on your credit report unless they try to collect it from a lack of payment. So how will a lender see those and evaluate if you can afford it?

If she qualifies for a decent mortgage rate her P&I on that house is less than $600 a month so it doesn't seem out of whack. I paid about that per month for my first house on a lot less than $16 an hour.

Exactly. Given the low cost of the house, I didn't really see it as unreasonable either at a 30yr loan. Most people would pay SUBSTANTIALLY more in rent costs.

 

[GoodRevrnd]

A lender doesn't need to see those things, it's not hard to have a model for assumed living expenses. Yeah, you have stupid consumers. It's naive to think lenders aren't also being stupid or myopic. That's how we got into the last mess. We shouldn't have to bail out either, but that's apparently the consequence for inadequate regulation.

 

[vi edit]

If she qualifies for a decent mortgage rate her P&I on that house is less than $600 a month so it doesn't seem out of whack. I paid about that per month for my first house on a lot less than $16 an hour.

It's not just a house. She also got a honda minivan which if it was new, starts at about $30,000 and goes up from there. We didn't get a price on that in the article, just that she took a loan out on it.

 

[vi edit]

And from housing, to college costs to cars, maybe things wouldn't cost so much if money wasn't so easy to get. Start making it harder to get approved for a loan and you'll start to see asking prices drop on things.

 

[jackstar7]

Also - I didn't blame it just on the person, I blame it on our crappy education as well. Finance 101 will tell someone that these are bad decisions. At the same time, If you're going into something like applying for loans, I feel that anyone jumping into something that important should have the initiative within themselves to better understand what they are signing.

I don't believe the lender should always be at fault - and frankly, it's a bit over the top to suggest such. Lenders DO their due diligence as I said, but are they able to see these? Cell phone bills, cable bills, grocery bills, gas bills, electric bills, drug money, prescription costs, medical debt that isn't in collections, etc? AFAIK - most of those aren't on your credit report unless they try to collect it from a lack of payment. So how will a lender see those and evaluate if you can afford it?

Exactly. Given the low cost of the house, I didn't really see it as unreasonable either at a 30yr loan. Most people would pay SUBSTANTIALLY more in rent costs.

TL;DR:
FYGM!!!!

 

[Engineer]

Ship higher paying jobs for general people out - check
Offer debt as a way to keep those people buying the products on lower incomes (including stupidly long terms on the loans) - check
Crash? ---- check?

Government bailout (of lenders...not little people) - CHECK!
Profit (of lenders - not little people) - CHECK!

 

[GoodRevrnd]

TL;DR:
FYGM!!!!

Seems like you're more reacting to the poster than the post... hahaha

 

[PricklyPete]

Ship higher paying jobs for general people out - check
Offer debt as a way to keep those people buying the products on lower incomes (including stupidly long terms on the loans) - check
Crash? ---- check?

Don’t forget to lower taxes without cutting spending so that you can pass some of this debt on to your kids and their kids.

 

[dyna]

https://www.reuters.com/article/us-...ottom-half-bolsters-u-s-economy-idUSKBN1KD0EM

Looks like our next looming debt crisis will be via credit cards, student loan debt, car loans, and medical bills instead of

Ultimately as far as fault, I believe this is partly on our shit education for not teaching finances 101. The main woman in this story basically got a big-girl job for the first time at ~$16/hour

But getting a big-girl job doesn't entitle you to a new car and a home. It just doesn't. Even if it did, the very least you should have done PRIOR to purchases is do a simple calculation of what your monthly costs will be. It isn't that difficult. It isn't the job of the economy to nanny your dollars - hence our freedom to spend how we please.

I don't feel like other americans should have to pick up your slack and bail you out because you made ill-informed decisions. In my personal case, I didn't go to a University - or an overpriced for profit school initially. I went to community college and stamped out as much credits as I could for mere pennies vs. what a university would charge. On top of that - I've yet to buy a new car in my life. Ever. Depreciation 101 tells you how cheap you can buy an affordable and reliable car for 1/3rd the price of what it was new.

Just focusing on the main story, they leave out some important details to support their argument which is what her payments were each month. I did a quick calculation and she would have about a 900-1k payment a month for the car(~18k) and house(119k) at 4.5% interest.

31k a year, isn't a lot of money but most people progressively make more, I'm sure that was factored in. I think they conveniently left out the part of her monthly payment since it really doesn't support their story that well. That was a valuable piece of information they could have included.

 

[jackstar7]

Seems like you're more reacting to the poster than the post... hahaha

It's the post, too. He's externalizing all the problems rather than considering how he might be part of those problems, or advocate for things that encourage those problems.

The Bold, Underlined, and Exclamation Points are certainly my trying to capture the unspoken parts of his overarching philosophy.

 

[zinfamous]

They do their due diligence - credit checks, verification of income and such... Are they supposed to have access to all of your life choices ? That seems a bit unreasonable and impossible. How are they supposed to know if you spend $50/week on a drug addiction or something?

I will blame lenders - in the case of things like our housing crisis where they did not do their due diligence...

lol. you naive little child

 

[zinfamous]

It's the post, too. He's externalizing all the problems rather than considering how he might be part of those problems, or advocate for things that encourage those problems.

The Bold, Underlined, and Exclamation Points are certainly my trying to capture the unspoken parts of his overarching philosophy.

"The next big financial crisis is clearly not a problem with the Finance Industry!"

LoL--these people actually think like this out loud, and they claim they are smart. fucking retards.

 

[Jhhnn]

What I assume is happening to some degree though is her debts are being securitized and the lenders have no incentive in the short term to ensure they are making sound lending decisions because the ultimate failure won't be on their balance sheets.

Well, yeh, but banks swap securities like spit at an orgy. Then they borrow against those securities. When banks can't sell or borrow against illiquid assets the whole thing falls down a la the ownership society.

 

[rommelrommel]

But she still sometimes trims her weekly $15 grocery budget to make ends meet,

Damn.

 

[Exterous]

We've been getting articles about the "Next financial crisis is brewing!" since 2009. Eventually they'll be right

In this same article she was approved for a car (of unknown costs) and a $119,000 house. On a $16 an hour salary.
It shouldn't take much mental math for a credit agency and lender to go "Oh, this income to debt ratio is bad" and deny the loan. It has nothing to do with drugs or whatever else. It's three numbers.

Its impossible to determine how to the car figures into this without value. Sure a new one can cost more than $30k. But I can also buy a used one for as low as $1500 so it might not really have much effect towards her mortgage. Also we have no idea if her mom or aunt who are living with her co-signed on the mortgage

 

[s0me0nesmind1]

And from housing, to college costs to cars, maybe things wouldn't cost so much if money wasn't so easy to get. Start making it harder to get approved for a loan and you'll start to see asking prices drop on things.

I dont think the democratic party would overall agree with your *ahem* ideas.

See how much your party base approves of "Not allowing hard working Americans to buy a home!". I mean like I said - that woman would be paying more than $600/month for rent. Given, a mortgage also usually entails insurance, mortgage insurance, and property taxes - but my point still remains... You would have a bunch of pissed off democrats, no?