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Excerpt from article:
U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks.

The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along.

More than US$221 billion of these loans at the largest banks will hit this mark over the next four years, about 40% of the home equity lines of credit now outstanding.

For a typical consumer, that shift can translate to their monthly payment more than tripling, a particular burden for the subprime borrowers that often took out these loans. And payments will rise further when the Federal Reserve starts to hike rates, because the loans usually carry floating interest rates.
'Wave of disaster' brewing in U.S. as more borrowers miss payments on housing bubble-era loans | Financial Post

What say you, other 3 or 4 people who post in the Finance forum?
 

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Bro of Bros, Bro.
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I've seen this disaster coming from a mile a way, for a while now. There are too many people way over their head, and I don't think there's a good way for that tab to get picked up some other way.
 

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Is Actually Recording
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Gut level, I wouldn't be wildly concerned. The home equity loan market just isn't nearly as large as the mortgage market, it won't be pleasant for the banks but I don't think we'll see failures.
 

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Why, it's almost like we "stabilized" the housing market by handing the banks a shitload of cash but did pretty much nothing to address the factors, like un- and underemployment, stagnant wages and astronomical levels of student debt - that are causing such a large number of Americans to have trouble paying their mortgages!

I can't imagine how we could have foreseen this becoming a problem. I mean, if I suffer a horrific injury that leaves my leg almost completely severed, I can just throw a band-aid and some neosporin on it and walk that shit off with no long-term ill effects, right?

As far as interest rates, I think it was Drew that posted that thread about how some economists think raising them would actually help the economy recover by devaluing the large amounts of debt being carried by many businesses and individuals. That thesis makes sense to me.
 

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Is Actually Recording
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As far as interest rates, I think it was Drew that posted that thread about how some economists think raising them would actually help the economy recover by devaluing the large amounts of debt being carried by many businesses and individuals. That thesis makes sense to me.
Sort of - by allowing inflation to increase, that would happen. There's been a lot more attention paid to inflation, less out of fear that it will happen or even necessarily desire that it will, as much as the fact it's still falling and deflation is becoming a real risk, which would be crippling.

How do I feel about short-to-mid-term policy? Like, do I like it, or what do I think will happen? The latter is easier - deflation is a larger risk than inflation right now, and the economy is growing but not robustly. I think there's a growing consensus that we'll see tapering inside 6 months - I think that's possible, but it will be purely symbolic (maybe a 5b cut) and if it does happen it'll be closer to the end of that range. I could personally see them going beyond. There's also growing talk of lowering the Fed Funds Rate further - right now it's a 0-0.25% target, and it could conceivably be cut fully to zero or even into negative territory to further increase the incentive to invest and take on risk, which is what this economy needs to recover.

Do I like it? I think the Fed did the best they could with the tools they had, and a few they created. The problem with artificially lowering interest rates is that in the wake of the credit crisis, lending standards are still (rightfully) very stringent, so the only people able to take advantage of low rates are people and companies who already have solid credit ratings. This is less of a concern for companies (though low rates bought corporate america a lot of time by allowing them to roll over maturing debt and lock in low rates, which has helped them shore up their balance sheets which in the wake of 08 the importance of doing just this cannot be understated), but for individuals it means that lower rates chiefly benefited those with good credit ratings and existing access to capital, which is almost the same thing as saying the wealthy.

That's not as broad as would be ideal, but there's no denying that at least in one segment of American society (say, the top 20%), lower interest rates has undoubtably driven mortgage refi/new initiation activity, investment in the stock market, and has resulted in an accumulation of net wealth through greater home equity and investment worth. That's again not in and of itself a desirable outcome, but it's a useful start - what we now have to wait for is the so called "wealth effect" to kick in, and a perceived increase in net worth (coupled with a very low ROI for deferring current consumption) to translate into consumer spending. This hasn't fully happened yet - we've seen a lot more "big ticket" purchases but not so much retail spending (and anecdotally, I'm about to close on a condo, but it's been a couple years since I've bought a new pair of jeans), but as that DOES begin to happen (and an increase in consumer confidence over and above that caused by an increase in wealth would be huge - in short, Washington collectively needs to stop being dickbags and lay off with the game of chicken) we should see consumer spending increase, retail hiring pick up, and with it a strengthening of demand for (comparably) unskilled labor that should help shore up the recovery.

I realize this argument bears a whole bunch of similarity to the idea of "trickle down" economics, so I'll also add this - in Reaganomics, tilting the tax code in favor of the wealthy was supposed to stimulate growth by increasing the supply of skilled labor (incentivizing wealthy people to spend more). That doesn't really work so well, as given the levels of taxation in the American tax code workers are pretty insensitive to small changes in tax rates. Here, there is a much more direct causal relationship to spending rates. It's not as good as increasing the wealth directly of ALL americans would be at stimulating spending, but I don't see how the Fed could have done that.

So, my thought personally is that the Fed did the best they could given the powers they had, and the biggest headwind they've thought is that not only has Congress not been supporting their efforts, in many ways they've been working directly against the fed and making moves that have hindered economic growth (the sequester, the shutdown - the former has been estimated to have taken 0.5% off the annual growth rate, while the later is ballparked at a further decrease of 0.2%. That's nearly a full percentage point, and if we're tooling around at 2-2.5%, suddenly jumping to 3.5% would be a pretty big pick up).

Really, I think QE just needs more time. I'm fine with another six months, maybe more, and further cuts in the Fed Funds Rate, possibly dipping into negative territory, wherein there's a cost to large national banks for leaving money in the bank in return for the guarantee it provides.
 

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Yeah I had a brain fart and conflated interest rates with inflation. Herp derp. :smack:

what we now have to wait for is the so called "wealth effect" to kick in, and a perceived increase in net worth (coupled with a very low ROI for deferring current consumption) to translate into consumer spending.
How is this actually supposed to happen though? You said yourself that the people benefiting from QE and low interest rates largely already have money. I'm not sure I understand how a perceived increase in their net worth is going to lead to them buying more shit, at least not to a significant enough degree to encourage hiring. Maybe I'm misunderstanding your argument, but it sounds like you're saying we need to wait for a fairly tiny minority of Americans to jump-start hiring by spending more money, which doesn't seem mathematically feasible to me.

If you've got enough money to take meaningful advantage of low interest rates, there's only so much more spending you can do. It seems to me that giving financially secure and/or wealthy people more/cheaper money won't really impact their spending that much because they've already got most of their expenditures figured out and budgeted for. As an example, I just got a nice fat overtime check because I've been putting in a lot of nights and weekends working on a big project recently. About $400 went toward tickets and hotel reservations for MDF so yay consumer spending I guess, but that's peanuts. The bulk of it just went to my student loans and credit card bills. If you gave that same ~$1,800 to someone making $15-20k a year, I'd bet you that very close to 100% would be spent on consumer goods, because that person doesn't have the luxury of investing extra income or paying down loans. They're gonna go out and replace their kids' fraying winter coat or finally get that knocking sound in their car looked at, or spend it on Christmas presents.

I've pointed it out before, but every dollar the government spends on SNAP benefits generates something like $1.70 because that's all money being spent in supermarkets and bodegas. Money given to poor people goes immediately back into the economy because the poor, by definition, spend all their money. If they could meet all their living expenses and have money left over...well they wouldn't be poor, would they? :rofl:

The way I see it, there are two ways to create demand which would work better. One, you get money directly into the hands of the much larger group of people living paycheck to paycheck-using whatever mechanism you want-so they can go out and spend it. Or two, you raise the effective rate of corporate taxes (meaning the rate that actually gets paid after all the loopholes and deductions and off-shoring) to the point where it is more profitable to re-invest your money in personnel and equipment than it is to take it out as profit. Point is, I don't understand why the only available option seems to be to hope that the relatively small number of wealthy and upper-middle class people will buy enough iPads to spur hiring. Case in point: the small group that's been doing astronomically well since 2008 have unprecedented ability to buy more, bigger, and costlier houses, but that demand hasn't been sufficient to improve the economy for everyone else.

Edit: To be fair, you DID say that the Fed doesn't really have the power to do the things I'm talking about. Unfortunately they've been trying to make up for all the shit that Congress hasn't been doing the only way they can.
 

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Is Actually Recording
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:lol: Hey, I find this shit interesting. And, you know, not torpedoing the economy is sort of important, too.
 
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