Future of Credit
 

First off, I would like to state that I know very little about this subject so just let me know if this question is not valid or at least some underlying assumptions leading to my question are not valid. My knowledge of credit is that banks will loan out money to people in the forms of credit cards, loans, or whatever, and the banks make money off interest rates from preset loan conditions or penalty rates from missed payments. I personally have never been charged with a missed payment and I will continue to do this but I luckily have not have to taken out a loan at this point.


So, yesterday I was talking to someone in his early 30s who has a secure job and family and he mentioned how he almost bought a bunch of houses in his neighborhood for cheap and then would make the money back in the form of rent. His logic is that since many people of my age, late teens and early twenties, will have really bad credit scores, they will not be able to take out house loans and will be forced to rent, therefore renting from him.

We then discussed how people are getting more irresponsible with credit and how many people will not be able to take out house loans, car loans, etc.

So my questions are, first, if this is true or just an overblown speculation? Then, how would this effect our credit system if banks do not trust the majority of people to take out house loans, sacrificing potential profits? As I said, I don't know much about this besides being responsible with credit, but wouldn't a large distrust between banks and loaners cause HUGE problems with the house industry? And if this is true, is their any speculation on possible ways those industries will evolve because of this?

There is not a huge distrust between lenders and loaners. If there was such a great risk to their profits they would not loan the money. But understand, up to this point, much of the laws regulating the banking industry (including the loaning industry, because you don't have to be a bank to loan money) has been written by their cronies in the various seats of power, at both a state and national level. The huge influence these industries have on lawmakers comes in many forms among them are payment to re-election and through lobbyists. Obviously the spotlight is on them now and in the last 2 years or so and they are all running and trying to distance themselves from the past. But if you examine who these industries gave money to in the past and look at the bills they passed into law it is pretty clear. Money is power in politics.

Credit card debt has skyrocketed in the last 10-15 years, currently over $1 trillion, and growing at about three times the rate of new credit cards being issued.

What that means is that millions of people owe far more on their credit cards than any previous time (on average three times as much - while average personal income has not increased by three times as much). As a result, millions of people are late in making even the minimum monthly payments, affecting their credit scores (over half of all credit card holders make only a minimum monthly payment) and millions more are choosing bankruptcy to erase the debt than any previous time and that number is growing...and the banks absorb those losses.

The banks have tried to protect themselves with various hidden charges and exorbitant fees...but the Credit Card Bill of Rights legislation that was enacted last year will put an end to many of those practices. As a result, banks are likely to tighten their policies on issuing new credit cards. At the same time, many of those millions of people who declared bankruptcy will be frozen out of the credit market for 7-10 years.

But, more than anything else, it is a matter of personal financial responsibility....for many, it is probably too late.

added:
The other issue that will adversely impact credit in the short term is the pending crash of the commercial real estate market with many banks wayyyy over exposed as a result of greedy, overly aggressive speculative (and unregulated) lending practices in this market...to the tune of $3-4 trillion. And when that happens, credit will shrink again.

The banks won't really be sacrificing profits in this case, because the number of actual houses/loans has not changed. Instead of giving 10 loans to 10 families, the bank is giving 10 loans to your one friend, and he is collecting rent from the 10 families. They are still collecting the same amount of total interest from your rich friend. Things only get bad for the bank (and for your friend too, incidentally) when houses start going empty--because single people start consolidating into roommate situations, unemployed people move back in with relatives, college-age kids decide not to move out into their own apartment after all, etc.

Things go bad for the friend when he has a secure job AND 10 rental properties full of young, bad-credit tenants to manage.

Well sure, he's taking that extra risk on himself by deciding to become a landlord. I've heard more than enough rental horror stories that I would never, ever deal with renting out a property unless I personally knew the tenants, and even then it would have to be extenuating circumstances.

you might want to google "money as debt" and watch the youtube video about the subject. good intro.

Don't let him fool you piercehawkeye, the God Damm Demoncrats are a big part of why we got into this problem in the first place. Like I said eariler, follow the money. :D

The belief that renting would be a good investment was very popular this past year. But statistics say the trend has been to move in with friends or family. Those expecting to profit from an increasing number of renters, so far, have been economically disappointed.

Second, some data suggests home prices have not yet fallen sufficiently yet. A large numbers of home that should be put on the market are being withheld. Many banks not even foreclosing just so their homes stay occupied for now. IOW are those homes currently priced low? Will a still to go lower housing market create losses that the rent will not cover? These are difficult and risky questions because numbers are currently so vague and contradictory – and may be different in that locale.

If you follow the money over the last 20 years, it has gone far more to Republicans than Democrats. (59% - 41%)
http://www.opensecrets.org/industries/indus.php?ind=F03

But the credit market is not about this as much as it is about increasing personal credit debt that is unsustainable at current levels and bad credit decisions on the part of lenders and borrowers.

Ohhh lets all point fingers. They are all too blame. We are all to blame.

Hey...just setting the record straight on the suggestion to "follow the money" since it was raised...the money trail speaks for itself.

But, IMO, again, that is not the issue nor, IMO, does "They are all to blame...We are all to blame" address the questions that piercehawkeye raised about the future of credit.

This is a good column from Fox ( ;) ) on credit card debt and the potential impact on the economy:

U.S. Consumer Credit Card Debt May Crash Economy
Pretty much what I said in my first post....and ultimately did contribute to the crash of 07-08, along with the bursting of the housing bubble that occurred at the same time.

While the column is from six years ago, the personal credit crisis has only got worse since then.

The ratio of debt to income is continuing to increase (pdf) and it is highest among the youngest consumers and far higher than it was 20 years ago, when people were more disciplined and less inclined to spend beyond their means.

That $50 billion personal debt in 1999 rose to $350 billion by 2003 and now in excess of $1 trillion.... this is unsustainable and, along with a pending burst of the commercial property market, will adversely impact the future of credit.

Or you can take the Merc answer for everything and just blame the Democrats.
:biglaugha

Good video if you cut out all the conspiracy theory crap. But thanks.

I guess this is what I'm trying to get at. I'm still trying to sort through Squirell's video by verifying the truthful parts with outside sources but the way I understand it is that loans and credit are what keep our economy growing and if credit scores are so bad that people stop taking out loans, wouldn't that greatly hurt the economic growth of the country? On a slight tangent, our current recession is due, at least in part, to the lack of loans out in the housing market?

Or you can look at the following categories, not just commercial banking as you listed.

Finance, Insurance & Real Estate
Commercial Banks
Savings & Loans
Credit Unions
Finance / Credit Companies
Securities & Investment
Venture Capital
Hedge Funds
Private Equity & Investment Firms
Insurance
Real Estate
Mortgage Bankers & Brokers
Accountants

With the exception of Insurance and Accountants the money has overwhelmingly gone to the Demoncrats looking at the election cycle of 2006, 2008, and 2010. The time since the Demoncrats became responsible for the mess we are in and their majority in Congress.

http://www.opensecrets.org/industries/slist.php

Once again you have tried to re-write history. Your party own this and has the responsibility now to fix it. For more than 2 years they have failed and the electorate has noticed. See you in Nov. :lol:

The current credit crisis did not begin in 2006 but in 1999 ...the tightentng of the market first reached the crisis point n 2006 (as predicted in the FOX column).

That $50 billion personal debt in 1999 rose to $350 billion by 2003 and now in excess of $1 trillion.... this is unsustainable and, along with a pending burst of the commercial property market, will adversely impact the future of credit.

To ignore the rising credit card debt over the last 10-15 years that led to that point is to ignore one of the key negative forces behind the current credit market.

And, IMO, most credit card holders will benefit from the credit Card Holders Bill of Rights legislation signed into law last year and taking effect this month...but that still wont fix the credit market.

That will require regulatory changes in the future along the lines adopted by the House earlier this year.

Actually it began before that. But I am sure that we can look at the influence of Barney Frank, ultra liberal democrat who set the stage for the meltdown, and as the Chairman of the House Financial Services Committee and his buddy Chris Dodd, who thank God will not be around after the next election. And to ignore the fact that the Congress has been controlled by the Dems for over 2 years and have made repeated promises to the electorate to change the way business is done only solidifies their failures and responsibility in this mess. There is plenty of blame for this mess to go around but 2 years is more than enough time to stop blaming other people for your parties failures.

I have not disagreed with that statement.

Putting the personal credit scores aside...you hit what is behind the Fed's current monetary policy...keeping interest rates as low as possible to keep credit flowing.

Along with pushing healthy banks to buy smaller failing banks. But that also tighthens the market because those healthy banks buy the good and bad assets of the failing banks and thus are not able to expand or extend credit to new consumers/small businesses.

The administration gave these banks a SHITLOAD of money under the assertion that they would lend it out - The banks haven't done that. Instead they have increased the pay and bonuses of their executives.

In fact, the TARP funds were given mostly by the previous administration and most banks have payed in full and are lending again, but more selectively, particularly those (like Wells Fargo after buying Wachovia - just one example) still paying off the bad assets of the banks they absorbed.

And capping bonues of the execs has been proposed and blocked in the Senate.

Got any ideas how to get past that roadblock?

http://www.salon.com/opinion/greenwa.../30/ownership/

Imagine that.:biggrinha

I give up.

Sorry piercehawk...its all Barney's fault even though he was in the minority party between 1994-2006 when the credit market blew up.

Take Merc and Classic's advice/critique (?) and go for the gold! They have all the answers!

You mean the bailout in October that Bush specifically consulted with Obama on beforehand?

"More Selectively" - C'mon. The banks haven't been loaning the money as freely as they should be. They are restricting capital to so many smaller business and cherrypicking the best of the rest. The idea was that the money would be getting back to the small business and general public through the lenders. That is NOT happening as it was envisioned.

Only half. The rest were controlled by the Obama Administration. Nice try to deflect responsibility.

Of a total of $700 billion.

http://en.wikipedia.org/wiki/Trouble...Relief_Program

Yes
Tons, but its just that, all speculation. The end result will depend upon how heavily regulated they are or aren't and the monetary climate at the time.

Obviously this entire situation is the result of a lot of mess ups from both sides.

Agreed - All three sides.

I offered my opinion to piercehawkeye that it was more an economic issue than anything else and explained why I thought that was the case. *shrug" he can take it or leave it.

And, honestly, I just dont understand how you (and Merc) can bitch about the current Administration not acting forcefully enough...and bitch when the House passes forceful banking/financial services legislation to address the problem, as it did last year.

Remember that discussion in the "more bailouts" thread? I mostly remember you bitching that I attacked a member of the community and Merc being against regulations and for regulations at the same time...and still blaming Barney, who pushed through the legislation.

Wait, I do understand....you guys just like to bitch and NEVER offer constructive solutions as an alternative to those proposed.

added:
my apologies to piercehawkeye for contributing to the resulting distractions.

When did I bitch about that? I bitched about a lot of things, but I don't think that was one of them. Then again I could have been in one of my moods . . .

Maybe when you guys start accepting blame for the current situation my tune will change. But as long as you act like your party has all the solutions and few of the responibilities...

The electrate is beginning to see through your Kabuki Theater.

Hey...I get it.

You guys dont like the recovery program to help stabilize the economy that was on the verge of collapse....but you dont have a better solution.

You guys dont like TARP that prevented massive banking failures and prevented even tighter credit markets and more collapse.....but you dont have a better solution.

You guys dont like the legislation passed by the House last year to regulate the housing finance marketing, derivatives and related financial instruments, and to require large banks to self-fund (in advance) any future potential bail-outs....but you dont have a better solution.

You guys dont like the Obama proposal to tax exorbitant salaries of bank executive or fees on largest banks to recover more TARP funds...but you dont have a better solution.

And you dont have a solution to cope with the tightening credit market.

Very constructive, I must say.

Then why are you blaming Obama 100%? What openly promoted and encouraged Enron accounting? Obama? Hardly. Who got stuck for eight years of wacko extremist spending?

Who surrendered Afghanistan to the Taliban? Who invented a lies - "Mission Accomplished" - leaving massive debts still to be paid? Who subverted the SEC even in 2001 - the Harvey Pitts testimony before Congress even refusing to accept any money to hire investigators - to all but protect Maddof, et al. And then who had to start spending massive TARP moneys to save America from their economic mismanagement and tax cuts to the rich? Let's see. Their political agenda. Same people said, "We want Obama to fail."

So let's blame Obama for all of it. At what point do those who most supported George Jr demonstrate the same level of competence? Blame Obama rather than apologize for being so wrong and so destructive to America. Another Limbaugh (and Hitler) propaganda technique. Cast blame elsewhere.

Bush spent money like water. The TARP plan has its deficits and that is a fact. Should all that money have gone to the banks? I don't think so. But I also don't have all the facts so anything I would say is speculation - same as anyone else.

How's that going? Seems like the money isn't getting to those who need it. I'm blaming the banks right now, but again I don't have all the info needed to make a better assessment. Neither do you.
Two separate things, taxing the high end of the income has, I believe, shown to decrease job creation.
I think the banks should be scrutinized much more than they are. Why isn't the money available to those who need it? Why aren't the banks lending? Why? why? why? The "too big to fail" are getting even BIGGER! Why?

Get the people working and get the money flowing. Once people are at work, He'll be able to do just about anything. If nothing else Bush proved that.

Oh, you missed the healthcare issue - Get the friggin thing done in pieces. Have a vote on pre-existing conditions. Have another on the medicare issue. Another on additional coverage for more Americans. Do them separately and make them all vote yea or nay on the issues. Lets make these politicians vote on the issues that are most important so we can really see who is for what and against what. By putting it all together it became a clusterfuck. Get some of this done in smaller pieces instead of a mammoth bill that no one really understands. That's been my belief since the beginning. Dealing with the costs has to be in there as well, but I think trying to do it wholesale was a mistake. If it was that good a bill with the super majority the "D"s had it should have flown thru. Especially if the unemployment issue wasn't so large.

Perhaps that was the problem - unemployment and timing.
I'm not just bashing Obama, perhaps it comes across that way, but I'm friggin pissed at all of them and the games they are still playing, the earmarks, the trips, the frivolous spending . . .
Global warming and "Don't ask don't tell" and some of the other issues are tertiary to me, at best. He's gotta get people working.
How to do that? If I knew that I'd be rich.

Oh, and just saying its all Bush's fault, wacko extremists, 80%, blah blah blah, ad-nauseum doesn't help.

I can't agree more...

That was helpful.

For those watching this economy. Who have seen 22% and 44% returns this past year. This may be when we take the economy off its drugs and let it start healing. This is when we start to learn how extensive the damage was. What everyone should be asking is whether January was when economics starts taking revenge. And how extensive that 'revenge' will be for spending on things such as "Mission Accomplished" and a 40% price protection to big Pharma.

We know we will have to pay for the 2000s. We just do not know how much, and in what form that economic revenge will appear. Inflation, dropping dollar, massive unemployment, stagflation, real estate devaluations, bankruptcies, 20% interest rates (which Volker and Carter's administration instituted to solve problems back then), or massive capital sales of America to foreigners. Examples of how economics may take revenge.

We know it must happen. We just do not know how severe and by which processes.

I can't agree more...

You got it, dar... uh, Pete. :thumb:

You can't do the preexisting conditions without universal coverage. If you didn't have to buy insurance, and you knew an insurance company had to take you on if you got sick, you would only buy insurance when you needed it. But insurance is based on the idea that there are enough people in the system who don't need it at any given time to pay for the ones who do.

That is something that has to be worked around. If we are going to require all to have insurance, as was in the bill previously, then that is no longer an issue.

It's an issue if you're doing things piecemeal. Eliminating preexisting conditions has to be paired with universal (or very close) coverage.

Of course, if you're requiring people to buy insurance, you need to subsidize it for people who can't. And you need to lower the cost, to minimize the nuimber of people who need to be subsidized. If you don't have funding for subsidies and something the CBO predicts will lower costs, the bill is going nowhere. And getting an industry that is exempt from antitrust regulation to lower their prices isn't easy.

There may be some parts of this bill that could be done piecemeal, but not much of the meat of it.

Well its probably not going to happen any other way either.

I like the idea of forcing the politicians to admit where they stand on each and every issue with a vote. I realize that all the issues are intertwined. I was looking for an alternate plan of action. Ya know something that actually gets something done. Then again I think this is more of a dead issue than most want to admit. That sucks an a number of levels.

Solving the insurance problem only starts to address the issue. Once the insurance problem is addressed, only then will the next problem be confronted.

Insurance companies have something like a 2% profit margin. Big pharma and medical equipment suppliers average 17% and 20+% profit margins. Making it illegal to buy the same drug from Canada or Mexico - to keep American drug prices 40% higher - did not help anything. And yes, same viagra made in Ireland sells for 40% higher in America compared to both Canada and Mexico - because our bought and paid for politicians know where campaign funds come from.