Now it Begins to Unravel

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The Credit Bubble Peak was Marked by “Totally Crazy Lending.”

Debt is good. More debt is better. Funding consumer spending with debt is even better – that’s what economists have been preaching – because the consumed goods and services are gone after having been added to GDP, while the debt, which GDP ignores, remains until it is paid off with future earnings, or until it blows up.

Corporations too have gone on a borrowing binge. Unlike consumers, they have no intention of paying off their debts. They issue new debt and use the proceeds to pay off maturing debts. Funding share-buybacks and dividends with debt is ideal. It’s called “unlocking value.”

Debt must always grow. For that purpose, the Fed has manipulated interest rates to rock bottom. Actually paying off and reducing debt has the dreadful moniker, bandied about during the Financial Crisis, “deleveraging.” It’s synonymous with “The End of the World.”

At the institutional level, “debt” is replaced with more politically correct “leverage.” More leverage is better. Particularly if you can borrow short-term at near zero cost and bet the proceeds on risky illiquid long-term assets, such as real estate, or on securities that become illiquid without notice.

Derivatives are part of this institutional equation. The notional value of derivatives in the US banking system is $190 trillion, according to the Office of the Comptroller of the Currency. Four banks hold over 90% of them: JP Morgan ($53 trillion), Citibank ($52 trillion), Goldman ($44 trillion), and Bank of America ($26 trillion).

Over 75% of those derivative contracts are interest rate products, such as swaps. With them, heavily leveraged institutional investors that borrow short-term to invest in illiquid long-term assets hedge against interest rate movements. But Treasury yields and mortgage rates have moved violently in recent weeks, and someone is out some big money.

These credit bubbles always unravel to the greatest surprise of those institutions and their economists. When they unravel, the above “End-of-the-World” scenario of orderly deleveraging turns into forced deleveraging, which can get messy. Assets that had previously been taken for granted are either repriced or just evaporate. But they’d been pledged as collateral. Suddenly, the collateral no longer exists….




On the way up, lots of money can be made on this debt, in myriad ways, including in interest and fees extracted from consumers directly, and in fees extracted by Wall Street, for example in repackaging risky consumer or corporate debt into highly rated asset-backed securities that are then spread to institutional investors who use proceeds from leverage to acquire them. But no problem; it’s just OPM (other people’s money).

Then there’s the peak. It’s marked by “totally crazy lending.” We’ve seen that peak. One sign: white-hot online peer-to-peer lenders, or rather “platforms” for risky consumer loans. They’re Silicon Valley inventions that were going to revolutionize lending and put banks out of business. They proudly operate with disregard for risks. They borrow from individual and institutional investors and extend unsecured personal loans to consumers. They also repackage consumer loans into bonds and sell them to over-eager institutional investors.

There are many of these platforms, including Lending Tree, CircleBack, LendingClub, LoanDepot, and Avant.

Avant makes unsecured personal loans up to $35,000, ranging from 2 to 5 years. It targets subprime borrowers with credit scores as low as 580 who wish to consolidate debt, i.e. flip their credit-card balances into a personal loan so that they have room to borrow more on their credit cards.

This is expensive debt. There are fees, including origination fees between 0.95% and 3.75% of the loan amount. According to Nerdwallet, which reviewed Avant’s loans, annual percentage rates range from 9.95% to 36%!

No one, least of all a struggling subprime borrower, is going to pay off a five-year loan with an annual interest rate of 36%. Or heck, even 26%. These usurious rates on unsecured personal loans practically guarantee that the borrower will have to default.

Yet, borrowers typically receive funds the same day, according to Nerdwallet, though it may take up to a week in some cases. And investors were eager to buy these loans, which is the definition of “totally crazy lending.” It marked the peak of the bubble.

Then it began to unravel. The amounts may be small in the multi-trillion dollar scheme. But they’re red flags that soothsayers are busily ignoring.

Citing unnamed sources “with knowledge of the matter,” Bloomberg reported that a slew of these subprime consumer-loan backed securities, which had been issued just last year, are already going bad:

Delinquencies and defaults are reaching key levels known as “triggers” for at least four different sets of bonds. Breaching those levels will force lenders or underwriters to start paying down the bonds early. Avant Inc. and its underwriters, for example, are going to have to begin to repay three of its asset-backed notes….

The four deals totaled over $500 million, nearly 20% of the $2.8 billion of online consumer-loan-backed securities sold in 2015. But the securitized loans are only a small portion of the loans arranged by online lending platforms, which in 2015, reached $36 billion. Bloomberg:

Online loans have shown other signs of weakening. LendingClub Corp. last month raised interest rates and tightened its standards for at least the second time this year after seeing higher delinquencies among its customers, especially those with the most debt.

Online lenders arranged only a small part of the $3.7 trillion in non-mortgage consumer debt outstanding, mostly student loans, auto loans, and credit card balances. While credit cards are still holding up, student loans have terrible delinquency rates, and subprime auto-loans delinquencies have jumped to the highest in six years.

LoanDepot began making unsecured online consumer loans last year. By September this year, according to Bloomberg, losses on its consumer-loan backed securities breached the ceilings set by its underwriters. Other online lenders are just trying to hang on:

Avant, based in Chicago, cut its monthly target for lending this summer by about 50%, and decided to shrink its workforce in line with that, while CircleBack Lending, based in Boca Raton, Florida, stopped making new loans earlier this year.

Several lenders have changed management this year. LendingClub’s Laplanche left in May and on Monday, Prosper Marketplace said its CEO Aaron Vermut is stepping aside in December.

Given the amount of central-bank liquidity sloshing through the system, the unraveling of the credit bubble will likely be a slow drawn-out process starting in these sorts of pockets here and there.

The online lending debacle isn’t the only red flag. There are others. And now we have this: it’s the “risk free” bonds that have bloodied investors. Read…  Bond Carnage hits Mortgage Rates. But This Time, it’s Real




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  72 comments for “Now it Begins to Unravel

  1. James Milne
    November 21, 2016 at 1:50 am

    I’m curious how the defaults in peer to peer lending will impact high finance. I’m very ignorant of this field, but if the lenders and borrowers are both “small-time”, would the bottom falling out of this industry cause any snowballing similar to what we saw with CDS’s in 2008?

    Those involved the big players. This current article seems to involve some pretty small fish. Although I know that there are huge issues currently impacting the “too big to fail” financial organizations, how will a collapse of peer to peer lending impact the bigger picture?

    • Petunia
      November 21, 2016 at 10:33 am

      The lenders don’t care about defaults because they package the loans and sell them as quickly as they are made. Just like the mortgage mess, this is out there. And besides the lenders know they will get bailed out again, and the borrowers don’t care either because they don’t have any assets left to lose. There is no down side to doing crazy stuff anymore.

      I too receive offers to borrow thousands on a signature even though my credit is terrible due to foreclosure.

      • Kasadour
        November 21, 2016 at 11:17 am

        Agreed. It’s a game of hot potato. Somebody is going to be left holding the bag. But I suppose it’ll be bought and sold through the financial system a few times before the music stops. How’s that for mixing methaphors.

        • Coaster Noster
          November 21, 2016 at 3:07 pm

          “hot potato” while playing musical chairs. You cannot keep your eye on both simultaneously, and eventually you are out. Good mix of metaphors.
          Our real problem here is (1) financial engineering at very high levels by PhD quants who demand “competitive” freedom-of-movement (i.e., no legal constraints). The governance is ultimately in the hands of our money-corrupted Congress, who are 99% too unsophisticated to even understand puts and calls much less derivatives and notional value. So it’s “play on” until the Singular Event, from the confluence of seemingly unrelated events….

          ….seemingly….

    • ru82
      November 22, 2016 at 2:05 am

      From my view of 2008. The new plan by Central Banks is to make sure no corporate debt will default. At least for the To Big to Fail.

  2. OutLookingIn
    November 21, 2016 at 1:57 am

    Could you lend me the price of a hamburger today, for which I will gladly repay you on Tuesday?

    Maybe most will be too young to recognize Wimpy’s famous line from the Popeye cartoons. It had it’s start during the last great financial crisis of the thirties, which for those who lived through it reinforced the old adage of;
    “Never a lender nor a borrower be”.
    Since repayment Tuesday never came around.

    History is now repeating itself with “Totally Crazy Lending” and absolutely insane levels of debt. There is no answer. There is no way out.
    The current system will cease to exist. It will deflate and collapse under it’s own weight.
    The great reset, realignment, revaluation, devaluation, etc:
    Whatever title you feel more using, is now upon us.

    • night-train
      November 21, 2016 at 3:55 am

      Wimpy should have had a credit card with which to buy the hamburger, then refi his home, taking equity out to pay off his credit card balance. Then he could have paid that burger off over 30 years.

      Spinach anyone?

    • mvojy
      November 21, 2016 at 8:11 am

      We NEVER saw Wimpy pay anything, ever. Looks like he just made empty promises to pay just like those that borrowed but didn’t need to borrow in the current debt bubble.

  3. d
    November 21, 2016 at 3:22 am

    These little flies will go Bankrupt , 1 or 2 of their CEO’S may be prosecuted as they are outside the Mainstream American Banking Fraud Operations.

    They have served their purpose, extending the American credit fueled bubbles.

    What we have to look forward to, is weather a Republican Congress cuts taxes,,The ACA, and most welfare. Then opposes p45 for the rest of his term or allows p45 to deficit spend on infrastructure and arms, that its crony’s are invested in and milking.

    This will determine weather there is a boom-BUST. Or simply a BUST under p45.

    The biggest risk is actually the boom-BUST scenario as the boom may last long enough to propel p45 into its second term.

  4. mvojy
    November 21, 2016 at 8:09 am

    How did earlier civilizations survive without debt and a 100% labor participation rate? By bartering

    • Kent
      November 21, 2016 at 11:17 am

      In Graeber’s book “Debt: the first 5000 years”, he says bartering is a myth. What people actually did was used their personal credit to get what they needed and paid folks back later. Example: farmer needs seed. Buys $500 worth of seed on credit from seed man. Pays back seed man back when the crop comes in.

      Another example: alcoholic uncle works for a living. Stops by bar on the way home every night and runs tab. Turns over pay-check at the end of the week.

      • d
        November 21, 2016 at 6:23 pm

        “What people actually did was used their personal credit to get what they needed and paid folks back later.”

        Historic Particularly in England which after the conqueror (1066) had very good TAX and generall records, dont agree with you.

        The only thing on credit was rent. due after the Harvest.

        Seeds where not brought they were mainly saved, from the previous crop.

        The Jew’s were always money lender’s, but they lent coins, not paper creations. Generally for construction purposes.

        Most of the “Credit” you claim existed, was created in the, Gambling and Pleasure industry’s. Today that is frequently classed as, predatory lending

        The chinese invented paper money and the paper credit system.

        It started many civil wars, due to excess money printing.

        Fiat and credit, have always been serious economic bubble blowing problems.

        Without much stronger contrlls on credit % and leverage they always will be.

        The voices of sanity were ignord in the 1930’s, and since. Now we have some of the biggest bubbles in Financial history.

        You will have the depression and chaos that goes with the big implosion that must follow.

        Creditors who want the easy life, simply wont have this

        https://en.wikipedia.org/wiki/Chicago_plan

        https://en.wikipedia.org/wiki/The_Chicago_Plan_Revisited

        its far to sane and simple.

        • micromacroman
          November 28, 2016 at 5:55 pm

          “The voices of sanity were ignored in the 1930’s.” Actually the post market crash of 1929 gave us the Glass-Steagall Act which separated out finance industries..banking-insurance-and stocks. Of course the Grahm-Leach-Blilly banking modernization act of 1999 did for finance what Obamacare is now doing to health care. Is it no coincidence that whithin 9-yrs of Graham-Leach we had the biggest stock meltdown since 1929 ? And thanks to the bankruptcy reform act of 2004 we are all eternal debt slaves.

        • d
          November 28, 2016 at 10:15 pm

          G S which should never have been repealed was only 1 part.

          Did you look at the link’s.

          Thats how Fiat should operate.

          In the 30’s, they could have forced it, now it will take a huge implosion to be able to do so.

      • Ray Blaak
        November 21, 2016 at 9:12 pm

        From what I understand from that book, debt existed before money as such, and was accomplished by people simply keep track of who owed what, what that was something concrete, or status, or favors, etc.

        E.g. think of being in the godfather’s debt after he did you a favor. His wealth is based on that he can call it in someday.

  5. David Rabinovitz
    November 21, 2016 at 8:25 am

    J. Wellington Wimpy: I’ll gladly pay you Tuesday for a hamburger today.

    Here is a better one, if I owe you $20,000 I have a problem; if I owe you $2 million YOU have a problem. The essence is the leverage or ability to shoulder and repay debt and what happens when lending gets excessive. I attended a Northeastern University after-hours network event in the late 1980s and the speaker explained one should never borrow so much from a bank that the bank has too much control of them but do borrow enough that if the loan goes into default it will pain the bank – then you’ll have two people interested in getting the loan back to performing status.

    Credit runs in five to seven year cycles. After a bust the economy turns and new loans go on the books. Five years is a common fully amortizing loan term. Once a full cycle has passed – all the new loans pay off – everyone forgets (especially in underwriting) that loans can go bad. Competition grows and lending gets looser and eventually when economic growth stops borrowers focus on repaying loans, the economy contracts and defaults spike upward.

    With an economy that is 70% consumer driven, as soon as consumer debt starts to rise we are heading for a problem. It might take five years to germinate but its coming – like a distant train in a Johnny Cash song.

    Businesses borrow but expect to earn on those borrowings, whether by a new office generating revenues or a new machine doing work more efficiently. When people borrow they typically consume with no future economic return (excepting cars and homes). As consumer debt grows so too does the risk of the next recession.

    I hear the train a coming it’s rolling round the bend, and I ain’t seen no good growth, since I don’t know when, I’m stuck in a downward spiral, and rates keep dragging on, but that train keeps rolling on down to San Antone…

  6. Paulo
    November 21, 2016 at 8:49 am

    Excellent article and comments. I have never been able to stand debt. Therefore, I have never had any beyond a modest home mortgage (paid off decades ago). I don’t know how people sleep at night without relying on the strength of numbers, “Everybody’s doing it”, or the simple belief that all debt is okay as preached in every tv add and auto showroom?

    But if that was how you were raised, would you know any better? We are now experiencing multi-generations of debt addicts in our ‘developed world’.

    Certainly, debt can be a good thing when it is used responsibly as an investment tool for building a new process, industrial plant, housing development, whatever. However, there has to be a realistic time frame of repayment that is not based on currency debasement and inflation. There must be an excess of profit to repay the debt. The debt should have been used to implement ‘a good idea’. I’m pretty sure Lending Tree consolidation loans don’t meet that criteria.

    Easy credit has been used as economic fertilizer, and as an attempt to replace the insane compounded growth levels of the past; growth based on a return of 100:1 energy levels. Like our waistlines, growth/girth change requires excess energy to our needs. Just 40 years ago energy return on energy invested was 100:1. It took one barrel (or equivalent) of petroleum used to reap a harvest of 100 barrels. No wonder the economy took off after WW2….lots of excess (cheap) energy, neglected consumer needs, and growing families. Nowadays, the return is as low as 4:1 (tar sands and fracked tight oil…shale). There is no real excess for growth. There is certainly no excess to repay the debts often used to retain profligate consumption and aquisitions of our day. Debt is not excess energy for growth and cannot be misused as such. Too bad it was.

    The day of reckoning is now upon us. This is going to hurt.

    • RD Blakeslee
      November 21, 2016 at 9:40 am

      Very sound analysis, IMO

      Paulo, I would be interested to know more about how you have ordered your financial affairs (if I’m not too inquisitive). You can find my way published in several commentaries following Wolf’s articles, if you are interested.

      Successful personal strategies which defeat prevailing foolish notions advocating debt as a way of life are of interest to me.

      • dwkunkel
        November 21, 2016 at 10:31 am

        Like Paulo, my wife and I have never had any debt other than our home mortgage which we paid off 25 years ago. Whenever we had extra money, we would pay on the mortgage principle. It took us 10 years to pay it off.

        We never buy anything we don’t need and when we do buy something, we pay for it with cash. We spend the extra amount required to buy things that are well-made and will last.

        The last part is maintenance. We maintain what we have rather than just buying a replacement. We typically keep cars, for example, about 20 years.

        • RD Blakeslee
          November 21, 2016 at 10:57 am

          A kindred spirit!

          For example, our Dodge Cummins diesel 4X4 pickup is now 21 years old and will last me out as will Our 18-year-old GMC Suburban.

          They are built to last and economically maintain, as is our39-year-old house which the family built for itself.

      • Curious Cat
        November 21, 2016 at 10:55 am

        Live below your means.

        • RD Blakeslee
          November 21, 2016 at 11:00 am
        • Paulo
          November 21, 2016 at 1:07 pm

          Warning…personal story….you may wish to skip.

          Hi RD etc.

          You folks summed it all for me so I don’t really have to post personal strategies. However, there are a couple of things from our past….. :-)

          This is in hindsight and therefore 20/20, but when I was 24 with a wife, infant, and new mortgage….I was lucky enough to lose my job. (1981) At the time it was terrible. I felt shame and bitterness, anger, but only for a little while. I then sucked it up by working away, taking cash jobs, and finally working full-time building a fish hatchery and staying on to be the hatchery foreman. The pay sucked, but to be honest it was about 2-3 times what the minimum wage was at the time. And just like today, minimum wage did not get you by. We barely made it from paycheque to paycheque, but did so with a large garden, venison, wood heat, stuff like that. We made it through until 1987 when I landed a full time salary job back at flying. We had to move, but it was a positive move in all ways. (As an aside, I was the only one in our family not to take help for schooling or training from my parents. I paid for flying lessons by banging nails. It took two years to get a commercial license and 5 years of part-time until the job loss).

          That experience changed me, losing the job. It made me crave the independence of being debt free, so we paid off our mortgage as fast as possible. In my 30s I drove an old wreck of a truck with a canopy and seat in the back for the kids. (Yes, they were humiliated, but when they complained I told them to be quiet or I would drive around with my bicycle helmet on). I commuted to work on a bicycle. I worked a great deal of the time. I even did university by correspondence working in a little office in my shop at 5:00 am until I had to leave for work…or when I had free time. It allowed me to teach highschool without a student loan, starting at age 40. I did this for 17 years, and also worked weekends, summers, and after school as a part-time pilot for logging companies. Sometimes I did renovations and hired my son as a helper. I could take my kids along on lots of flying trips so it was pretty fun for everyone.

          The point of this is that because we lived so well on so little our whole lives, we took the same mindset into retirement. I retired at 57 after going through some cancer and now live on a river. Our house is small by today’s standards, but I built it myself. We still heat with wood, and it is lovely. We have a great lifestyle with the freedom to do what we wish, when we want to, because we have no debt.

          My father-in-law (product of starvation in the Great Depression) told me that when he finally paid off his house it was like he got a 100% pay raise. He said he went from never having any money to always carrying $100 in his wallet..($500 today). He was right.

          My kids don’t really have ‘the frugal mindset’ because they have not had tough times. My daughter barely shops specials, and they run out of things and chase around to the closest store for milk or bread. My son worked for years in the Alberta oilsands. He has always made huge money as an industrial electrician. I think he was worse off than what we were because he wasted so much money on ‘stuff’….pissed away thousands of dollars. Now that he is running his own business, he worries and often complains, but still is doing 1,000% better than we did in our thirties. I can preach all I want about things, but until this younger generation is forced to economize they don’t really think they should have to.

          We’ll see. Maybe sooner rather than later if this article is correct.

  7. Sound of the Suburbs
    November 21, 2016 at 9:00 am

    What is missing from today’s economics?

    1) The work of the Classical Economists and the distinction between “earned” and “unearned” income
    Reading Michael Hudson’s “Killing the Host” is a very good start

    2) How money and debt really work. Money’s creation and destruction on bank balance sheets.

    3) The work of Irving Fisher, Hyman Minsky and Steve Keen on debt inflated asset bubbles

    4) The work of Richard Koo on dealing with balance sheet recessions

    5) The realisation that markets have two modes of operation:
    a) Price discovery
    b) Bigger fool mode, where everyone rides the bubble for capital gains

    There may be more ……

    2008 – “how did that happen?”

    Debt inflated asset bubble leading to Minsky Moment.

    Money creation from debt makes everything look good as the bubble is inflating.

    Bubble bursts.

    Money destruction from debt repayment leads to debt deflation.

    • Dan Romig
      November 21, 2016 at 2:01 pm

      I agree with everything I have read and viewed (via YouTube) that Richard Koo’s published and presented. I can not think of a better choice to replace Janet Yellen with than Mr. Koo!

      • Sound of the Suburbs
        November 21, 2016 at 2:18 pm

        I found out about Richard Koo through ZeroHedge and watched all his videos on YouTube, he explains a lot.

        There are people that know what is going on and how to fix it but they are all side lined.

        Economics needs a rebuild from the bottom up starting with the work of the Classical Economists – Michael Hudson goes into all the things they knew in the past that are forgotten today.

        There is a lot of evidence to suggest neoclassical economics came into being at the end of the 19th Century to hide the undesirable conclusions of the Classical Economists including the difference between “earned” and “unearned” income.

        It’s core is a complex web of unusual thinking that is designed to hide reality, you can’t build anything sensible on these foundations.

        Keynes’s work had to hived off into a separate macroeconomics to leave the horrible core in place and some of Keynes’s thinking had to be lost and changed to hide the really obvious clashes with the core.

        It started off badly and got worse …. neoclassical economics ….. today’s economics.

        • Coaster Noster
          November 21, 2016 at 3:21 pm

          The “past” had no reference to our current speed of communication, and knowledge of markets, so “all the things they knew in the past” are not “forgotten today”, they simply are superseded, especially because there are SEVEN BILLION humans on the planet. This is the part of the equation that many ignore. It is a HUGE FACTOR in how economics work.
          What really needs to happen, in my hmble opinion, is to outlaw all the FINANCIAL ZERO SUM GAMES that have proliferated since 1980. Too many smart people can make an inappropriated amount of money, watching four or five screens simultaneously, and buying and selling oil daily, never taking delivery, etc. Taxation has to NOT be blind to the method by which money is accumulated…if it doing good works for the greater good, it simply cannot be classified in the same manner as financial gambling.

        • Sound of the Suburbs
          November 22, 2016 at 5:23 am

          A historical lesson on free trade that everyone in the West has forgotten.

          “The Anti-Corn Law League was a successful political movement in Great Britain aimed at the abolition of the unpopular Corn Laws, which protected landowners’ interests by levying taxes on imported wheat, thus raising the price of bread at a time when factory-owners were trying to cut wages to be internationally competitive.”

          The landowners wanted to increase their profit by charging a higher price for corn, but this posed a barrier to international free trade in making UK wage labour uncompetitive by raising the cost of living for workers.

          The US has probably been the most successful in making its labour force internationally uncompetitive with soaring costs of housing, healthcare and student loan repayments.

          These all have to be covered by wages and US businesses are now squealing about the high minimum wage.

          Housing booms throughout the West, unbelievably silly.

          The removal of low cost housing, e.g. council housing in the UK, unbelievably silly.

          The bankers want to increase profit but their only product is debt.

          What asset price can they inflate to shift more of their debt products?

          Housing (real estate) will yield the highest profit through mortgages and an existing asset can be used for this purpose (the bankers have no real product apart from debt).

          The bankers play the part of the landowners of the past raising the cost of living with rising mortgage payments and rent posing a barrier to free trade for the West as its labour is so expensive.

          Come on Trump, if you think you can be the first member of the elite in the West to work out the bleeding obvious since the 19th century.

          US healthcare and education providers also play the same role.

          In the good old days when the Classical Economists studied small state, raw capitalism firsthand in the world around them, Adam Smith observed:

          “The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

          Adam Smith saw landlords, usurers (bankers) and Government taxes as equally parasitic, all raising the cost of doing business.

          In the 18th Century they understood business and trade.

          Read Michael Hudson’s “Killing the Host” to find more old knowledge that has just been forgotten but still applies.

        • JerryBear
          December 1, 2016 at 2:07 am

          It was ultimately an elaborate attempt to avoid dealing with Karl Marx’s devastating conclusions, predictions that are now coming all too true. Amazon for example is a perfect illustration of Marx’s principle of maximizing profits by cruel and merciless exploitation of workers.

        • d
          December 1, 2016 at 2:53 am

          “Amazon for example is a perfect illustration of Marx’s principle of maximizing profits by cruel and merciless exploitation of workers.”

          problem with marx is that he went to far the other way. So his Proposals and attempts at it, are just as doomed as lassie-fair capitalism is.

          What is needed is environmentally sustainable, nationally and socially responsible, capitalism, with a working social safety-net.

          As opposed to the creeping Socialism the left always brings. Which is simply take, then take more, then more, from any who produce.

          One of the greatest breaker of a social safety net, is uncontrolled, unskilled immigration. Allowed in, to reduce labour rates.

          Simply look at how the NHS has deteriorated in the last 50 years. Unskilled immigration has killed it, as the unskilled immigrants and their huge familys never make a long term positive contribution, to any social service, for generation’s after they arrive.

          The west has got itself into a mess by allowing globalization, without good rules, and to much, unskilled, Culturally and Socially incompatible, immigration.

          There is no longer an easy fix, and probably not a democratic one.

          As nobody will be allowed to hold power in a democracy for long enough to resolve many off the issues successfully. As there will always be a populist or leftist like sanders or crobyn promising FREE FREE FREE that the RICH WILL PAY FOR. In any Democratic process.

        • Sound of the Suburbs
          December 1, 2016 at 11:24 am

          When Adam Smith observed small state, raw capitalism the first time round he noted it was the wealthy that got a free ride.

          “The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”

  8. RD Blakeslee
    November 21, 2016 at 9:26 am

    Then there’s the peak. It’s marked by “totally crazy lending.” We’ve seen that peak. One sign: white-hot online peer-to-peer lenders, or rather “platforms” for risky consumer loans.” – Wolf

    Wolf, during the course of each day I have to dump at least a dozen “YOU’RE PRE-APPROVED (etc.)” into my email junk. Some of the same “benefactors” persist, dump after dump. (Too bad there’s not an ad blocker for email.)

    How am I “selected”, or do these scrooges just lie and blanket everybody?

    • November 21, 2016 at 9:49 am

      “How am I selected”: The three credit bureaus (Equifax, TransUnion, Experian) SELL your credit data and personal information to whoever pays them for it. That’s their business model.

      You can put a “credit freeze” on all three credit bureaus. It’s a hassle, but it stops them from selling your credit info. This stops identify theft along with all these ads and all kinds of other things. I did that in 2009 (after UT at Austin told me they’d gotten hacked and all my info was compromised, including my SS#). Best thing I’ve done about my privacy and security.

      If you do, even YOU cannot apply for credit anymore (until you remove the freeze … more hassles).

      • RD Blakeslee
        November 21, 2016 at 10:07 am

        Thanks, Wolf.

        I probably should not freeze my credit because I use credit cards instead of cash for nearly all purchases and pay off the balance each billing cycle. I use “cash back” cards and have switched cards for the best deal in that regard, and may want to switch again – hence the need to retain my credit options.

        Also, insurers use credit scores to set your rates and an excellent score means a lower rate.

        Re protection of identity: Several of the institutions I deal with have reported their records have been hacked, including personal date on me. Consequently , they have collectively provided several credit monitoring services, free of charge.

        It may be *chuckle* that my location also offers some de facto protection: What savvy crook would think there’s anything to steal in WV?

        • David G LA
          November 21, 2016 at 11:36 am

          RD

          the freeze doesn’t prevent you from USING credit cards. It “freezes” all parties out of your credit reports. Banks can’t ping your report and so stop offering you more credit. Thieves can’t open accounts in your name as your credit file is locked.

          I placed a freeze about fifteen years ago. You have to unlock it each time you need a new line of credit. I have had to do this about seven times in fifteen years. A refi. A car. A new credit card.

          A little hassle but it brings a lot of peace of mind.

        • November 21, 2016 at 11:50 am

          I should have pointed out – as David G has now pointed out – that existing financial relationships (your bank, your current credit card companies, etc.) are NOT impacted by the credit freeze and can continue to get the info they need.

          Also, your current credit cards, credit lines, and loans are not impacted.

          If you do this, just make sure you don’t have to apply for any NEW credit (car, cell phone account, mortgage refi, etc).

      • November 22, 2016 at 12:22 pm

        Don’t You mean :

        “If you do, even YOU cannot apply for Debt anymore (until you remove the freeze … more hassles).”

        :)

        .

  9. Ed
    November 21, 2016 at 9:58 am

    There is also a hoard of a new type of payday type lender out there operating online that offers a credit line with high fees plus sky high pay day lender type interest rates that make 36% look cheap.

    I just read this morning that Dallas, TX is on the edge of BK due to police and fire pensions being underfunded as bad as Chicago. It seems that Texas in the 1990’s enacted the same police and fire pension give aways that Illinois did.

    • Ivy
      November 21, 2016 at 10:56 am

      Here is some further detail about the Chicago mess and related troubles now appearing elsewhere. Privatization seems like a good thing, at the slogan level. Upon examination of the details, there is a wealth transfer and service degradation. What’s the matter with Kansas now expands to include other jurisdictions.

      http://talkingpointsmemo.com/features/privatization/

      • Kent
        November 21, 2016 at 12:17 pm

        Private companies are about maximizing profits. Which means minimizing costs while maximizing revenues. When it is coming out of your tax dollars, maximizing revenues is never good.

  10. Mary
    November 21, 2016 at 10:10 am

    My laptop’s version of this morning’s Wolf Street featured an ad for Quicken Loans’ Rocket Mortgage. Ironic.

    Didn’t the Republican platform promise to reinstate Glass Steagell? Or was that just a threat to extract campaign contributions from the peer to peer loan industry?

  11. zoomev
    November 21, 2016 at 10:24 am

    And don’t forget Trump said in a public forum…”I love low interest rates.”

    And I remember him saying there is nothing wrong with debt and the US can just print it’s way out, I’m paraphrasing a little on the former not so much on the latter.

  12. Matt
    November 21, 2016 at 10:43 am

    These online guys’ sole revenue source is churning money. When they cut volume by 50% to 100%, that’s called throwing in the towel. There’s no more blood to be squeezed. Their entire customer base is basically a field of turnips. And if that’s true, it means that the fertile fields of good credit are either fully planted or gone fallow (nobody plows a marginal field when there’s rich soil available right next door).

    Planting to harvest is what? 3-6 months? What we’re planting right now is no new credit creation in a system that relies on ever-more new credit creation.

    In other news, my parents bought a new Kia Optima over the weekend. Not a Rio. Not a Forte. Not a used Soul. An Optima. With Bluetooth. That they got a loan at all — let alone $20k+ — should terrify all of us.

    • Kent
      November 21, 2016 at 12:01 pm

      LOL. My mother and step-father (in their ’70’s), just sold their fully paid off house for $115K. Now they’re renting for $1000/month. And, just bought a 3 year old F-150 for $23K. And a Sig-Sauer handgun for $800. I’m guessing I’ve got about 5 years before they decide that my back bedroom looks good.

      • Petunia
        November 21, 2016 at 1:42 pm

        This is probably the best decision they can make at this stage. If they are in the US and get sick, Medicare will take that paid off house. They have maybe 10 years left and they can count on medical cost eating up their savings. If they don’t have any assets they qualify for everything.

        I think they have a better idea of what’s going on than you do.

        • Kent
          November 21, 2016 at 4:08 pm

          Didn’t think of that. You might be right.

        • kitten lopez
          November 21, 2016 at 6:48 pm

          (huuuge smile)
          ..and there she goes AGAIN.
          x

  13. katoNokto
    November 21, 2016 at 10:49 am

    Wolf,
    I looked at ‘TREE’ and it is up more than 1% today. Why is that? I don’t think you are wrong, I noticed the co. is 42% insider and 52% institutional. Also they are reporting positive earnings. Where are the defaults showing up?

  14. Happyfamily
    November 21, 2016 at 11:05 am

    My wife and I have been shopping for a used car lately. We have one car at the moment, and are working to upgrade a bit in size to support the equipment for her growing business. Here in the Bay area the dealers arent negotiating. They say this is the price, and then I leave. They want so much money for cars, I cant believe it. Similar with craigslist. Still lots of easy credit out there, and lots of people buying cars at very expensive prices. I wonder when this maddness will stop.

    Sidenote – while driving through Sunnyvale, Cupertino, Saratoga I cant help but feel this place is so overrated. Unless you like 60’s trackhomes, no yard, and stripmalls… When will other people start thinking the sane thing? Maybe im off base.

    • MaxDakota
      November 21, 2016 at 11:55 am

      We have this conversation in our household at least once a month. When we first arrived in LA from the east coast, I couldn’t understand what the hype was about, and it STILL annoys and confounds me that houses have no basements. Don’t get me started on strip malls…

      Agree also that I look around at car ads, home prices, even gas and grocery store prices and everything is still going like mad! I read the news, I read this blog, then I look outside and wonder how California continues to live in its own reality.

    • Niko
      November 21, 2016 at 12:58 pm

      I have a couple of friends in the Auto business, Upper Management Level Retail, and they told me they expect a glut of pre-owned vehicles to hit the market in mid to late 2017.

    • katoNokto
      November 21, 2016 at 5:11 pm

      I was was watching the game this weekend and GM is offering 20% off on MSRP. That does not make sense in a growing economy.

      And will somebody explain why these defaulting short term loans are not showing up in the lenders share prices?

      • November 21, 2016 at 5:55 pm

        No problem. Many of these online lenders, like Avant, are startups and are not publicly traded. Here are two that are publicly traded:

        – LendingTree down 26% from its peak in Aug 2015

        – Lending Club down 78% from its peak in Dec 2014

  15. Kasadour
    November 21, 2016 at 11:32 am

    These credit bubbles always unravel to the greatest surprise of those institutions and their economists.

    Yes, they do and it starts, as was stated, by a natural rise in treasury yields. Now a daily funds rate hike is 100% priced into equity markets? What a joke. There is absolutely no point to raising the funds rate now, other than to make an excuse for (pad the way) more FED easing. Economic laws are much like any other natural, physical law (entropy, gravity, energy, et cet) that the FED thinks it can control the natural laws of economics is like saying it can defy gravity. The bounce back will be amazing.

  16. nick kelly
    November 21, 2016 at 12:05 pm

    Of the non- mortgage debt- the student loan book is largely an illusion, but to paraphrase that great sage, it’s consensual.

    However the non-obvious elephant is the auto loan book.
    We know that house mortgages can be sub-prime and become worth less than face value.
    But they don’t automatically lose value- autos do.
    A house physically depreciates very slowly- if the roof is replaced as needed.
    On the other hand a car depreciates 10-20 % when it is driven off the lot and is doing very well if it hasn’t lost 50% after 5 years.

    The collector niche excluded, unlike real estate, it will NEVER appreciate.

    The point is that the apparent asset backing auto loans is booked at maybe double its real value. These loans are a hybrid- a large part of the loan is actually a personal loan, but for new cars with manufacturer low- interest rates, they are pretending to be 100 percent backed by collateral. If the customer actually had to obtain an unsecured 20 % down via a personal loan, he would have to pay 19-29 % on that.
    A nothing down auto loan is already sub-prime.

    Most days I drive by a Nissan lot- a company with its critics but I can testify that the Versa is a tough piece of machinery.
    Anyway, their lot is overflowing, like most lots, and currently emblazoned with many signs saying ‘Final 2016 Clear Out!’
    But what does the word ‘final’ mean?
    It does happen, rarely, that a manufacturer means it when they say ‘sale ends X date’
    But how can the sale of 2016 cars be ‘final’?
    Are they going to raise the price when 2017 arrives in 5 weeks?

    For an example of what can happen when auto loans go south big time- Michael Lewis describes the Irish real estate crash.
    At the peak of the bubble Ireland was building half as many houses as England, or 400% more per person.
    Large numbers of Polish workers helped build them.
    At one point in 2008, the parking lot attendants noticed that some cars never moved.
    They had been abandoned by the workers who had flown the coop.
    These were newish cars with big bank loans, of course now underwater.
    Incredibly, at least one bank sent collectors to Poland (almost a knee slapper) to no avail.
    But at least they returned.

    When this auto loan thing blows up, its impairment may approach that of student loans.

    • milking institute
      November 21, 2016 at 9:17 pm

      That’s why i decided to LEASE my next car,239.00 a month for three years,nicely equipped Kia Sorrento,give it back to the dealer”it’s your problem now” just make sure you stay within the milage and don’t put holes in it!

  17. Kent
    November 21, 2016 at 12:10 pm

    In 2012, I bought $500 worth of lending club $25 loan “tranches” for fun to see how well it would work. I had a range of loans from the best at 5% interest to the worst at 25% interest.

    By 2015, I had $462. 4 of the loans were in default, including 2 of the supposed highest quality ones. It appears that the way to make money is to buy and sell loans that people are actually making payments on in the background. I wouldn’t do it with any real money.

    • Petunia
      November 21, 2016 at 3:07 pm

      When you bought the 25% loans, did you ever think about the moral or social consequences of the money you might make, or was that not a consideration? I ask this with no bias intended even though the bias is imbued in the question. I am genuinely interested in how investors look at investments from “certain” sources.

      • Kent
        November 21, 2016 at 4:15 pm

        I did not. I was generally interested in the overall idea. I think I was a exceptionally naïve at the time as these companies were advertising themselves as a way for people to help each other out and bypass the big bad banks.

        What I found out is that they are really just fronts for the big bad banks. Most of the people looking for funding were looking to consolidate high-interest credit card debt at lower rates. My guess is that banks found value in unloading debtors with a high probability of default on us unsuspecting rubes.

        • Petunia
          November 21, 2016 at 5:41 pm

          Thanks.

  18. NotSoSure
    November 21, 2016 at 12:46 pm

    Actually looking at these companies, how are they different from credit cards? Unsecured, check. High interest, check. I mean the difference is that you max out that card right away.

    In a sense, I think these guys are only delaying the inevitable i.e. with lower interest, some people can extend and pretend for a while, but eventually it’s still goodbye my love.

    I still think these companies still have a way to run though. Also, what’s missing from this article is that Goldman Sachs is now getting into the business as well with a platform called Marcus. Not sure what their spin is, but presumably Goldman will not get into an unprofitable business.

  19. Tom Kauser
    November 21, 2016 at 1:13 pm

    As derivatives are being worked off the cap on interest rates will be removed as fresh capital is able to be redeployed into more credit?
    The idea that the new chief executive will do anything to ruin the coming bankers Paradise is entertaining.
    The fed is stuck defending the balance sheet?
    The compression of spreads is something the fed is not going to give up without a fight!
    The fed controls the yield curve and gets more bullish as it continues to take profits?

  20. chillbro
    November 21, 2016 at 1:16 pm

    The capital’s last squeeze of the wage slaves before collapse. Wages have barely moved up over the last 15 years while cost of housing, education, and healthcare has gone up by x2, x3,, or x4. Ever wonder how those bills still get paid? Who benefits from loose credit? Wage slave or the capital?

  21. Doug
    November 21, 2016 at 2:46 pm

    I will sum up the next credit crash the same way I summed up the last one. The smartest guys in the room are not smart enough to figure out that when you loan money to people that have no money they will not pay the loan back.

    • Sound of the Suburbs
      November 21, 2016 at 3:04 pm

      Securitisation allows them to sell the bad debt on after it has been repackaged.

      They all do the same until the system saturates with bad debt.

      The whole thing collapses and they have to be bailed out because they are TBTF.

      Glass- Steagall stopped this sort of thing.

      Jim Rickards (“Currency Wars” and “The Death of Money”) has explained how the removal of Glass-Steagall allowed Wall Street to repeat 1929.

      In 1929, they carried out margin lending into the US stock market to artificially inflate its value. They packaged up these loans in the investment side of the business to sell them on.

      In 2008, they carried out mortgage lending into the US housing market to artificially inflate its value. They packaged up these loans in the investment side of the business to sell them on.

      With Glass-Steagall they have to take responsibility for loans they make as they can’t sell them on, which is why they don’t want it.

      • Petunia
        November 21, 2016 at 3:15 pm

        I have always considered most derivatives fraudulent instruments because the issuers know in advance the entire income stream will not be there to service the debt. This is true of mortgage and other high yield loans, like auto and credit card debt. All of these instruments should be sold on exchanges where everybody can see the quality of the entire pool over time.

    • NotSoSure
      November 21, 2016 at 3:09 pm

      Wrong, the smartest guys in the room are really smart. What they’ll do is sell to the people who think that they are the smartest in the room.

      I hate to quote Warren Buffett, but even he can be right sometimes: “If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.”

      • WTFrogg
        November 21, 2016 at 5:32 pm

        A wise old crocodile he is indeed old Warren. As much as I question his methods, etc., I have to admire his lifetime ROI of just under 20%.

        Remember the days when in order to get a loan or credit from a financial institution you had to PROVE you didn’t need the money ??

        IIRC that was just before the U.S. went off the Gold Standard and the specter of free and easy consumer credit reared its ugly head.

  22. Allan
    November 21, 2016 at 4:17 pm

    Another good reason to keep the Consumer Financial Protection Bureau alive and well.

  23. Vichy Chicago
    November 21, 2016 at 7:59 pm

    “and someone is out some big money”

    I’m guessing some of those someones are pension funds and insurance companies.

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