Loan Modification

Debunking The Great Myth Of US Consumer Deleveraging

By Implode-Explode Heavy Industries

We have long chuckled at the assertions of some analysts (namely Mish and Rosenberg) that Americans are going through a mass consumer "change in psychology and behavior" to one of thrift. We see no evidence of this supposed voluntary epiphany anywhere in real life: instead there are people simply getting cut off from their borrowing at an extreme point of delinquency/default. The only Americans who talk of "cutting back" are the ones who have been cut off.

Now a WSJ article (aptly picked up by ZeroHedge) confirms these suspicions: there is no change in consumer behavior; Americans are simply running out of credit (or more accurately, their ability to service debt). It's rather sad; we might be seeing a voluntary change towards thrift if it wasn't for the blaring chorus of the government, banks, and the mainstream media shouting that there's nothing wrong, and even if there is, it'll all be back to normal next quarter. This is the exact wrong message for an era when people should be moving towards thrift. From the article:

Luckily there is a way to quantify which road has been more travelled by. As the WSJ points out, in the period in which consumer credit has declined by $610 billion, banks and other institutions have charged off $588 billion in mortgage and consumer loans.

What are the implications of all this? As ZH suggests, it likely means this (economic downturn) will end badly. Imagine if we were seeing actual savings, and a scaling back of consumption -- the economy would be more blatantly ailing now, but more pain would be saved later and a solid foundation would be built for durable growth. Instead, we are saving it all for later. I'm not sure what form the sudden readjustment will take, but it is sure not to be pretty.

Full post as published by Mortgage Lender Implode-o-Meter on September 19, 2010 (boomark / email).