Condemned To Repetition

George Santayana memorably observed:  “Those who do not remember the past are condemned to repeat it.”

Hey, does anybody here remember 2008?

isantay001p1A report released yesterday by the Federal Reserve discloses that Americans have just set a new record for accumulated credit card debt.  The grasshoppers among us had saddled themselves with a total of $1.021 trillion in outstanding revolving credit in June, just edging out the previous record of $1.02 trillion set in April 2008.  Total household debt in the U.S., which totes up housing, auto, student loan, and credit card debt, reached a new record of $12.72 trillion in March, which also passes its 2008 peak level.

Of course, those of us who do remember the past recall what happened in and around 2008 — banks failed, the subprime mortgage bubble burst, and the economy was thrown into the Great Recession.  For a while, Americans reacted by tightening their belts, paying down their credit card debt, and getting rid of some credit cards — but those days of responsible consumer behavior apparently are long over.  Recently, credit card debt has been growing at an annual rate of 4.9%, and more consumers are getting access to credit cards.  More than 171 million consumers had access to credit cards in the first quarter of 2017, which is the highest such number since 2005, when about 162.5 million people had access to credit cards.  And some banks have made the conscious decision to provide credit cards to people with subprime credit scores.

Gee, what could go wrong with this scenario?

It’s all not-so-vaguely and scarily familiar, but a lot of people apparently just don’t care.  They think times are good now, and therefore times will always be good — so why not use that credit card to buy another impulse purchase consumer good that they don’t really need?  The problem is that, in our interconnected economy, the irresponsibility of the grasshoppers can pull down the ants among us, too.  If the heavy credit card borrowers start defaulting on their debts en masse, and banks and businesses start feeling the pinch, we’ll feel the unfortunate results, too.

If Santayana were still with us, maybe he’d change his famous statement to read:  “Those of us who remember the past but are unfortunate enough to live with other people who do not remember the past are condemned to repeat it, whether we want to or not.”

Puerto Rico’s Impending “Bankruptcy”

Puerto Rico has been struggling financially for years.  Yesterday the U.S. territory  decided to invoke a new federal statute that will allow the island to go through a process something like bankruptcy, in hopes that it will be able to shed its crushing debt load and get a “fresh start.”  Puerto Rico owes $74 billion to bondholders and has another $49 billion in unfunded pension obligations and has been unsuccessful in convincing Congress to bail it out or cajoling creditors into making concessions.  Making timely principal and interest payments on its debt requires $3.5 billion in payments a year, but Puerto Rico has only $800 million to spare.  The inexorable results of that math made the quasi-bankruptcy inevitable, triggering what will be the largest government “bankruptcy” process in U.S. history.

no-bailout-puerto-ricoThe process will be something like a bankruptcy because Puerto Rico — like every U.S. state and territory — technically cannot go through the traditional federal bankruptcy process.  Instead, Puerto Rico has invoked the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), enacted during the Obama Administration, which contains some elements of the bankruptcy laws but also includes special provisions providing that, in some ways, Puerto Rico must be treated as a sovereign.  Under the PROMESA law, the process of dealing with Puerto Rico’s debt will be supervised by a federal bankruptcy judge.  Chief Justice John Roberts will appoint the judge, who will then start deciding what to do with Puerto Rico’s appalling financial problems.

Puerto Rico invoked PROMESA because a stay that had prevented creditors from suing ended and a series of creditors immediately filed suit, hoping to be first in line to be paid.  The PROMESA law stops those lawsuits and, Puerto Rico hopes, will give it substantial leverage to negotiate with creditors and try to convince them to take pennies on the dollar for the debt — with the threat that, if creditors don’t agree, the federal judge could impose an even more draconian result.  Creditors are furious.  Republicans in Congress aren’t willing to go with a bailout option, arguing that Puerto Rico has already received big federal subsidies and should explain why it got into this predicament.

It’s an entirely reasonable request that, frankly, could also be made to many U.S. cities and states that face similar debt issues.  Puerto Rico’s economy has struggled for years, and Puerto Rico officials decided, year after year, to borrow to pay their operating expenses rather than doing the responsible thing:  cutting costs, pruning government employee pensions, trimming payrolls, and forsaking pet projects in favor of fiscal prudence.  Now creditors and employees who have pension obligations will have to take pennies on the dollar, and according to a federal board Puerto Rico is “unable to provide its citizens effective services” — all because Puerto Rico’s politicians were unable to make the tough decisions and kept borrowing to put off doing so until some point in the future.  Now that time has come.

Investors who may have bought Puerto Rico bonds at a discount, after the difficulties became obvious, might not be sympathetic characters, but many of its bonds likely are held by individuals who viewed bonds issued by a U.S. territory to be a pretty safe investment that would help fund their retirement years.  And employees who have earned pensions will receive less than they were promised, meaning they’ll have to tighten their belts even though Puerto Rico’s successive governments didn’t do so.  And a default of sorts on Puerto Rico’s governmental debt isn’t going to be helpful for other governmental entities that want to borrow through issuance of bonds, either.

Interesting, isn’t it, that the federal statute that allows Puerto Rico to go through the quasi-bankruptcy process — PROMESA — sounds a lot like “promise”?  Thanks to its governmental mismanagement, for Puerto Rico the PROMESA process it will be more like promises broken.  I only hope that the successive administrations who put their heads in the sand and borrowed, borrowed, and borrowed are in some way held accountable for their gross irresponsibility.

Living On The Card

The Wall Street Journal reports that, sometime this year, the collective credit card balances for Americans will hit $1 trillion.  That’s just shy of the all-time record — $1.02 trillion — that was reached in July 2008.

We all remember what happened after July 2008, don’t we?  Subprime mortgage defaults soared, the housing market crashed, Wall Street firms toppled, and the American economy stood on the brink on catastrophe.  Credit card debt wasn’t a primary cause of the Great Recession, but in those tough times many American families recognized that owing too much money wasn’t particularly prudent and they needed to change their ways.

antandgrasshopperOver the next few years, our collective credit card balances declined steadily, and then stayed flat for a while.  Lately, however, they’ve been moving up again, and the trend lines are unmistakable — people are using their credit cards more and are carrying larger balances on them.  Auto loan balances, too, are at record levels.  The WSJ reports that much of the growth in collective credit card balances has come because banks have been reaching out and marketing their cards to subprime borrowers.  (There’s that troubling subprime word again.)

Any financial advisor will tell you that racking up substantial, long-term credit card debt isn’t a good practice, and that people would do better to set budgets, establish personal savings to provide a cushion against unexpected costs, and live within their means rather than borrowing for nonessentials.  Americans aren’t very good at that, however, and they’ve got short memories.  When you combine the mounting credit card debt with the declining savings rate in America, and then you read stories about how almost two-thirds of American families couldn’t handle an unexpected $500 car bill or a $1,000 hospital bill, it makes you wonder whether we’re on the brink of another big economic problem.

Why are Americans like the grasshopper in the tale of the ant and the grasshopper?  One of my retired friends who enjoys light reading about behavioral economics says that discipline views it as a combination of a desire for immediate gratification and a kind of paralysis in the face of potential financial problems.  He notes that even when Americans take courses on basic personal financial concepts and thoughtful planning, the lessons just don’t sink in, and the old bad habits remain.

At some point, however, the piper needs to be paid.  People who live from hand to mouth, with maxed-out credit cards that require large monthly payments,  might avoid complete disaster and make it to retirement, but with it’s not going to be the retirement of their dreams.  Without any personal savings, and with only Social Security to fall back on, they’re looking at “golden years” that are distinctly grim.  There’s a reason the grasshopper in the tale usually ends up in a threadbare coat, begging for a handout.

Student Loan Scofflaws

The Wall Street Journal recently reported that 43 percent of the people who have borrowed money from the federal government’s principal student loan programs aren’t making payments or are behind on meeting their debt obligations.  The people comprising that 43 percent collectively owe the federal government more than $200 billion.

The figures are stark, and staggering.  3.6 million people who are out of school and in the workforce are in default on their loans — which means they haven’t made a payment in a year.  Another 3 million people are delinquent on their payments, which means they’re at least one month late but not yet a year behind, and another 3 million have received permission to postpone their payments because of some kind of financial emergency.

studentloandebt070313_0The federal government is trying to figure out why payments aren’t being made, and some consumer groups are contending that debt services aren’t letting the troubled borrowers know about available payment options.  Three realities, though, seem pretty clear.

First, many of the people who thought getting a college degree, any college degree, would be the ticket to financial security have learned that they were wrong.  Whatever their major or career plans, there just aren’t enough good jobs out there to allow them to repay their loans.  Second, the feds do virtually nothing to determine whether student loan borrowers are good credit risks — they don’t typically perform credit checks, require co-signers, or evaluate whether the borrower’s intended course of study or capabilities make repayment likely.  And third, once you’re out of college and trying to make it on your own, your student loan debt is the lowest of the debt priorities, behind your home loan, your car loan, and your credit card debt.  What’s the federal government going to do, repossess that diploma that isn’t worth the paper it’s printed on?

It’s not clear whether the federal government’s experience is true for all student loan debt.  If so, that’s a troublesome fact, because the WSJ article also notes that there is now more student loan debt than credit card debt, car loan debt, and any other kind of consumer loan debt.  Student loan borrowers collectively owe $1.2 trillion.  If almost half of the federal borrowers aren’t making their payments, will the same thing happen to that enormous pool of debt?

Politicians love to talk about how everybody should go to college and the federal government should help them do so by making loans available.  That siren song sounds good, but the reality is more uncomfortable.  Readily available student loans have just allowed colleges to jack up their tuitions, and college degrees aren’t a guarantee of a good career and financial success.  College isn’t necessarily for everyone, and struggling students aren’t going to benefit from borrowing tens of thousands of dollars to scrape by and get a degree in a major that isn’t in demand in the economy.   And broken windows theory would tell us that it’s not doing America any good to have a growing body of millions of people who aren’t paying their debts.

Greece Is The Word

If you’re somebody who has been saving for retirement and investing your savings in the financial markets, here’s a bit of friendly advice:  don’t check the markets today, or for that matter all of this week.  You’ll just be depressed.

The problem is Greece.  It defaulted on its repayment of loans from the International Monetary Fund last week, and yesterday its voters overwhelmingly rejected a referendum that would have imposed strict austerity measures.  Greece’s finance minister Yanis Varoufakis, who had opposed the austerity measures — he once said that “austerity is like trying to extract milk from a sick cow by whipping it” — then resigned with a flourish, saying that the referendum result would “stay in history as a unique moment when a small European nation rose up against debt-bondage.”

“Debt bondage”?  That’s a good one!  Try it on your bank the next time your mortgage or car payment comes due.

The problem for Greece is that there is no alternative to repaying its debts.  Greece is paying the piper for electing bad leaders who didn’t recognize the inevitable crash that was coming from constant borrowing to pay for a broken economic and pension system.  After defaulting on its IMF loan, Greece really has nowhere to turn for cash.  Who is going to loan money to an impoverished country where the citizens apparently don’t recognize their obligation to repay their debts?

All of this would be a valuable economic lesson in unsustainable borrowing if Greece were just going down the tubes by itself.  The problem is that Greece is part of the European Union, and its problems therefore are Eurozone problems.  Now European leaders need to figure out whether they have Greece exit the EU — not exactly a ringing endorsement of EU political and financial stability — or extend still more credit to the Greeks, which probably isn’t going to sit well with voters in Germany and other prudently managed EU countries who wonder why they are picking up the tab for Greece’s problems.

All of which loops back to affect those of us who have saved and invested.  Financial markets hate uncertainty, and the Greek crisis has now become uncertain to the nth degree.  Today we’ll be seeing news coverage of closed Greek banks, crowds in the streets trying to find cash, and frowning finance ministers going to meetings in ornate European buildings — not exactly scenes that speak of financial stability.  So even though the Greek problem has nothing to do with the U.S., in our global economic system our financial markets will be affected just the same.

It will be a wild ride until the Greek problem is finally resolved, and there really is only one solution:  Greece will need to leave the EU, issue its own currency, and witness the worst hyperinflation seen in Europe in decades.  After its economic system crashes and its elderly citizens see their savings eaten up by inflation, maybe the Greeks will recognize that some austerity and continuing “debt bondage” really wasn’t so bad.

Student Loans And Shrinking Choices

We’ve all heard a lot lately about college students graduating with crushing amounts of student loan debt.  A recent Washington Post article brought home the grim and spiraling reality of student loan debt — and made me wonder what its long-term ramifications are for the families of those students and the economy as a whole.

The Post article compares consumer debt loads in 2005 to those in 2014.  Nine years is not a long time — less than a decade and only one presidential administration ago — but the changes are dramatic.  The percentage of 20-somethings with mortgage debt has fallen from 63.2 percent to 42.9 percent, and the percentage with student loan debt has almost tripled, from 12.9 percent to 36.8 percent.  In short, fewer are borrowing to buy a tangible asset and more are borrowing to acquire an intangible asset with uncertain value.

We don’t know how far up the age scale this exchange of mortgage debt for student loan debt extends, but the homeowners among us should consider what a shrinking pool of potential buyers means for the value of our property and our chances of selling it.  Banks won’t view young people who owe tens of thousands of dollars in student loans as good candidates for hefty mortgage loans, and young people who can’t find the high-paying job they need to make debt payments won’t want to be saddled with a house that might interfere with their freedom to move to where jobs are more plentiful.  The upshot is shrinking choices for debt-addled 20-somethings and shrinking options for the rest of us.

But the impact goes even farther.  The Post article shows that people in their 60s also have increased their student loan debt, and that more families in every income bracket are borrowing to pay for college.  The cost of a college education thus affects entire families, with credit-worthy senior citizens taking out loans to help their children and grandchildren pay for that diploma.  The acquisition of new debt by 60-somethings runs counter to the most fundamental rule of retirement financial planning, which is that people nearing retirement should pay off debt rather than taking on more.  How many older people are deferring retirement to pay off student loans — and in the process hanging on to jobs that might otherwise be available to those recent college graduates?

For too long we have viewed a college degree as a kind of holy grail that will inevitably produce a successful career and have geared national policy to make college more “affordable” by increasing the availability of student loans.  That approach has removed any incentive for colleges to hold down costs, and the result is sharply increased tuition costs funded by long-term consumer borrowing that affects entire families.  I’m as much of a fan of a college education as anyone, but isn’t it time to challenge our colleges and universities to figure out a way to provide that education at lower cost?

Like Federal, Like State

We tend to talk a lot about the federal debt — and for good reason! — but there are reasons for concern on the state level, too.

A recent report on the amount of debt at the level is very sobering.  The report looked at regular debt, the 2013 fiscal year budget gap, outstanding unemployment trust fund loans, unfunded benefit liabilities, and unfunded pension liabilities, and showed that for all of the proud words of the governors who spoke at the Republican and Democratic conventions, many states are drowning in debt.  California is in the worst shape, with a stunning $617 billion in debt, followed by New York ($300 billion), Texas ($287 billion), Illinois ($271 billion) and New Jersey ($258 billion).  Ohio, unfortunately, stands sixth with $239 billion in debt.  The state in the best shape is Vermont, with only $5.8 billion in debt — less than 1/100th of the amount owed by California.

In all, states are laboring under a crushing $4 trillion in debt.  It’s just another reminder that the flood of red ink is found across our country — and that it’s high time we start doing something about it.