What’s Behind the Subprime Consumer Loan Implosion?

These are the good times, but why are subprime credit cards, auto loans, and short-term installment loans blowing out?

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

OK, we’ve got a situation in subprime consumer loans. The delinquency rate on credit-card loan balances at the nearly 5,000 smaller commercial banks in the United States – this means all banks except the largest 100 – is blowing out, according to Federal Reserve data. In the third quarter, the delinquency rate at these banks rose to 6.25%. That’s higher even than during the peak of the Financial Crisis.

Back in 2016, the credit-card delinquency rate at these banks was in the 3% range. It has more than doubled in two years.

Credit card balances are considered delinquent when they’re 30 days or more past due. This delinquency rate means that out of the banks total credit card balances, 6.25% are 30 days or more past due. This is a disturbingly large rate.

But delinquencies are a flow. Balances are removed from the delinquency basket either when the customer cures the delinquency, such as catching up with past-due payments, or when the bank “charges off” the delinquent balance against its loan loss reserves. But as these delinquent balances were taken out of the delinquency basket, even more new delinquencies fell into the basket, and the delinquency rate rose.

Subprime auto loans have also been blowing out.  In the third quarter, the serious delinquency rate of the $1.3 trillion in auto loans has risen to 4.71%, the highest since the worst months of the Financial Crisis, when the auto industry collapsed, and when the US was facing the worst unemployment crisis since the Great Depression. In the third quarter, about 21% of all subprime auto loans were seriously delinquent – meaning 90 days past due.

Then we got another glimpse of this upheaval in subprime with some of the specialized lenders that cater to them.

For example, World Acceptance Corp., which does small short-term consumer installment loans, and some larger medium-term loans to people who need money desperately and have subprime credit ratings. Like most specialized subprime lenders, World Acceptance charges blistering interest rates, but then it also has large default rates.

It reported disappointing results now two quarters in a row, and its shares have plunged 45% over the past four months. So what’s going on here?

Back in 2009, people were defaulting on their auto loans and credit cards and their installment loans because over 10 million people had lost their jobs. This is not the case today. Back then, new unemployment claims – a sign of layoffs – spiked to astronomical levels. These days, they’ve been hovering near historic lows. So today, these people are working, and they’re falling behind on their debt service.

Subprime doesn’t mean poor or uneducated. Subprime means having a credit score below 620.

For example, a family of two working adults and two kids: The household income is $200,000. They bought a house and stretch to make the mortgage payments. They bought nice cars and have to make payments. Their kids cost all kinds of money, and it adds up, and they’re spending every dime they make. Then one of the earners gets seriously sick and can’t work for a few months, and the deductible on their health insurance is $4,500, and soon their six credit cards are maxed out.

So they go through daily triage about what to pay: mortgage payments, auto loan payments, minimum payments on their maxed out credit cards, groceries, clothes for the kids, bills, gas, and so on. And they fall behind, and late fees are racking up, and their credit score drops below 620, and they’re subprime.

They can still borrow, and they can still get more credit cards, but now under the terms of being subprime.

So banks take risks on credit cards because credit cards are immensely profitable. Until they’re not. Credit cards – unlike auto loans or mortgages – are unsecured loans. And recovery when the loan goes sour is small. The bank may sell the delinquent credit-card account to a debt collector for cents on the dollar and that’s all it may get.

The hope is that income from interest and fees from other subprime credit cards that are still current are making up for the credit losses. The whole thing is structured that way.

So the banks take big credit-card risks for big profits. And when the losses pile up, at least at first, they’re just part of the cost of doing business. The calculus works out in good times, and snaps back in bad times.

We can use the nearly 5,000 smaller banks with their credit-card delinquency rate of 6.25% as a stand-in measure for subprime. Here is why:

The largest 100 banks have a delinquency rate of just 2.56%, which remains low by historical standards, and is just a small fraction of the peak delinquency rate during the Financial Crisis. They can offer the most sophisticated incentives and marketing to attract the prime-rated customers. Overall, they have most of the customers and most of the credit card balances. And they get the lion’s share of prime customers. They also go after subprime. But since they have the lion’s share of prime customers, the portion of subprime customers don’t weigh heavily in the mix.

But smaller banks can’t offer the same kinds of incentives and marketing and often miss out on prime customers. So proportionately, they end up taking more subprime customers, including those that were turned down by the largest banks. And in this way, they become a measure of subprime credit card delinquencies.

But why are credit card loans and auto loans and other risky consumer loans now running into this kind of turmoil, when they hadn’t in 2016? There is no employment crisis. We haven’t seen millions of people getting laid off. But there is something else going on here.

I can see two factors.

One factor in the subprime turmoil is greed. People with a subprime credit score know their credit score. They know they’re having trouble borrowing. They’ve been turned down. They can’t buy a car and finance it at the ultralow interest rates they see in ads because they don’t qualify. Same with credit cards. They tried to get the 2% cash-back credit card with no annual fees and 7.9% APR and got turned down. They’re now conditioned to take whatever they can get.

In other words, for the industry, they’ve become sitting ducks. Lenders offer them credit cards with the highest interest rates and the biggest fees. Auto dealers make big-fat profits off these folks. And specialized subprime lenders charge them dizzying interest rates to finance these cars.

That’s all they can get. No one forces these people to take those loans and credit cards, but they’re trying to maintain their lifestyle, however basic it may already be, and they’re trying to feed their kids and drive them to school, and so they borrow at these high rates to make ends meet.

But the high interest rates increase the probability of default because these people who are already strung out will have even greater trouble making the payments. That part is driven by the industry’s greed. Aggressive subprime lending went into overdrive starting in 2014, and private equity firms piled into it, and smaller banks went after it, and it’s now coming home to roost.

The other factor in the subprime turmoil may well be something else, something that would impact people the most who are already strung out, people who have jobs but they’re living from paycheck to paycheck, and not necessarily because they’re splurging, but because, at their level of the economy, prices of goods and services they need have risen sharply and outpaced their incomes. And this can happen overnight.

This includes healthcare costs, and it includes food costs, and apartment rentals, and cars have gotten a lot more expensive, and the like. But cars and apartments and cellphones have gotten a lot better too, and these quality improvements are added to the price. Think of the move over the years from a four-speed automatic transmission to an eight-speed automatic, or from two airbags to 10 airbags, or from a basic cellphone to a smartphone.

But for figuring the inflation measure of the Consumer Price Index, the costs of these quality improvements are removed from the index. This is the principle of hedonic quality adjustments.

Inflation measures the loss of purchasing power of the dollar: what the same thing costs over time. But when quality improves, such as in a car, it’s no longer the same thing, and the costs of those quality improvements are removed from the inflation index.

So the CPI for new cars has been essentially flat since 1995, meaning no inflation for 20+ years, when in reality, the actual prices have jumped. For example, the price of a new Toyota Camry jumped by 25% between 1995 and 2019.

With used cars, it’s even worse. The CPI for used cars has declined by 11% since 1995. But actual used car prices have soared since then.

This goes for many other products and services across the spectrum. And then consumers, even when their income rises faster than inflation as measured by CPI, run into this problem where their income no longer suffices to buy these goods and services, including used cars and health care or housing, because actual prices of these goods and services have far outpaced both inflation as measured by CPI and wage increases.

This goes increment by increment. What might have worked last year, suddenly doesn’t work anymore this year. These consumers with jobs, that have been living from paycheck to paycheck, suddenly find themselves confronted with a 20% increase in health insurance premium or a 10% increase in rent, or both.

And suddenly, their whole fragile equation doesn’t compute anymore, from one day to the next. And they fall behind. As more consumers are getting caught up in it, subprime starts to blow out, even in what are considered the good times because actual prices have outrun these people’s incomes, and they’re confronted with it, such as with rent or healthcare, from one day to the next.

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  110 comments for “What’s Behind the Subprime Consumer Loan Implosion?

  1. Joe says:

    In Ontario, Canada, the unsecured creditors are poop out of luck should the defaulted are on a pension or on social assistance. Even taking to small claim court would win the judgement and yet fail to collect due to the above.

    • Daedalus says:

      The ‘unsecured creditors’ should have thought about that before they lured people into loans that were unsustainable.

      Of course, it wasn’t just the loan people doing the luring.

    • nick kelly says:

      True anywhere in Canada and I assume most of the states. After OJ lost his civil case and the plaintiffs were awarded, I believe, 30 million, for a long time they recovered next to nothing. They couldn’t touch his NFL pension even though it was 50 K per month.

  2. nick kelly says:

    ‘But when quality improves, such as in a car, it’s no longer the same thing, and the costs of those quality improvements are removed from the inflation index.’

    There haven’t been any improvements in car quality. The big (although not fundamental) improvements since the mid 70’s.. 80’s are electronic ignition and fuel injection.
    The latter was considered such a big deal when Detroit finally got around to doing it like Daimler in 1935, that for a while the car’s butte proudly proclaimed: Multi-point.

    All this stuff like screen displays, fob keys, Blue Tooth,
    and (shudder) cars that talk are not improvements, they are bells and whistles that many consumers would do without (or even prefer to not have) in return for an price artificially raised because the car is ‘loaded’

    • nick kelly says:

      Typo: should read: ‘Price not artificially raised…’

      • Mean Chicken says:

        The newest technologies ensure new cars are more disposable items than they ever were before. Also, IMO, I believe the fleet is no longer worthy of 250k miles, as previous generations were.

        • Paulo says:

          My neighbour has 500K km on his F-150. I have 380K km on the Westie, mind you it is always rebuilt and maintained. Change oil and filter often and use good quality oil, as well as changing the tranny oil and coolant once in awhile and there is no reason a newer vehicle won’t make 500K miles if not abused.

        • cd says:

          Cars run forever, buyers now lose interest in 2 years and exchange….service intervals are becoming rare, warranty is 100K at some OEM’s……

    • Paulo says:

      I will disagree with you Nick on that one. And this is from a guy who drives an ’81 Westy. Vehicles these days, since the mid 70s, do not burn oil. I used to work in a gas station during high school in the early 70s. Common wisdom was customers add a quart of oil, anyway, per 1,000 miles (if not more). Even my rebuilt Westy burns very little oil, and my 17 year old truck burns absolutely none between oil changes. My nephew is an automotive engineer working for a major supplier. In fact, he is a VP. He often states they don’t make a bad car any more. Some, are better/best, and some have lousy appearances, but the engine and train/delivery are almost always very good. Sure, airbag conflicts and some Hyundai’s caught fire, but it is very rare. My wife’s Yaris is 10 years old and also does not burn oil between changes. The clutch is original as well. By the way, we special ordered crank windows. :-)

      It is the computer driven machining and fit that makes all the difference, imho. It is quite exact. Having said this we will never buy a new car. I bought a new truck in my twenties and never forgot that after 6 months it was just the truck and not very exciting at that. I do very much agree about the electronic bling crap. I hate it.

      • Prairies says:

        Some cars still burn oil to this day. Consumers just don’t accept 1Lt/1000Mi as a norm anymore.

        I can come up with a laundry list of motors that have a history of burning a minimum of half a litre per 5000km, but that isn’t a big enough issue to care.

      • Non insane California resident says:

        Tell that to people buying Mercedes, BMW’s, Fiat-Chrysler, modern Nissan, all giant money pits that are basket cases after 100k miles if they even make it that far(especially the FIATS) Bad cars are made everyday and bad ones are designed every year.

    • Cashboy says:

      I believe that second hand values of cars will crash in the future as just too complicated to fix and electronic components are expensive to replace and go out of date so fast.
      Hybrid cars (part electric part engine) are the thing now but that requires complicated electronics for the car to decide what to be using.
      I live in Thailand and am considering buying a simple Toyota Hilux Pickup truck with simple Diesel 2.4ltr before they start complicating things.

      • RepubAnon says:

        I have over 150k miles on my hybrid, with no major repairs. It still looks new.

        That said, they should generate an inflation measure based on the ratio between the median salary versus the median expense of housing, transportation, and food – with child care thrown in under a separate column. This might better measure how folks are doing in today’s economy.

      • JohnnySacks says:

        It’s not the mileage, it’s the age. I use mass transit so our 11 year old car only has 50k on it. Corroded connectors, wiring, sensors, and lack of parts will kill it long before anything in the engine, transmission, suspension, or brakes. Nobody can fix that other shit. Another one driving off sold on Craigslist for $500 running fine with an unfixable dashboard warning light on.

    • Craig says:


      There have been improvements in road saftey.

      As well as in mileage and more reliable parts. Which means lower running costs and higher upfront costs.

      Plus in environmentally friendly cars.

      In the UK we have companies that churn out $15,000 bare bones spec cars.

      No radio No air con(open the windows) , no gps, no bluetooth. Takes about 15 seconds to get to 60 mph.

      (Keeps it cheap & how often do you need to accelerate faster than that?)

      Top speed of 100 mph. Looks boxy. If you showed it to someone from the 1960s. About the only extra thing they would notice is the USB power point.

      It gets you from A to B as safely and cheaply as possible with the minimum of bells and whistles.

      Mostly built by the ex soviet states.

      They seem to have trouble entering the US market though. I think it’s because of the strength of dealers. Who want to sell fewer high value cars. So they can make out on the debt payments. Rather than more cheap affordable ones.

    • Happy1 says:

      ABS is a huge improvement in safety. General vehicle quality if light years ahead of the 70s, cars of that era rarely saw 100K miles, now a car can make 200K miles in most instances with relatively minor repairs. I hate that a basic vehicle includes all the electronic doodads that I don’t need, but a 2007 Corolla is a far better vehicle than anything from the 70s in every possible way.

      • nick kelly says:

        My 2001 Civic doesn’t have ABS (I think) and stops VERY quickly. It will have dual diagonal brakes to avoid total brake failure. There have been all kinds of problems with ABS including law suits.

        Re: Corolla better now than 70’s: What did I say?
        I said ‘since the 70’s’. Most cars then might have electronic ignition but won’t have fuel injection. which improves fuel economy and saves all kinds of grief with carbs like flooding.

        Let’s take another look at WR’s piece and tweak my comment a tad. WR is pointing out that they adjust inflation to account for car ‘improvements’
        So let’s go back a mere 19 years to my 2001 Civic.
        I presume there have been adjustments to account for ‘improvements’ since then. (In fact it wouldn’t surprise me if this sleight- of- hand dates from after 2001.)

        Like what? What fundamental improvements have there been in Japanese cars since 2001? (I say Japanese because they are ahead of domestics. GM didn’t have true fuel injection or multi- valves until later)

        BTW: there are several much older Civics running around town that have the original body style and may be 70’s but are no newer than 80’s. Hondas didn’t start going into high miles (thanks to all these ‘improvements’) in 2008.

        However there is at least one comment I can’t reply to without research. This is the claim that engines are made more precisely since I guess the 80’s? I just don’t know if pistons, rings, bearings etc. are made more precisely now.
        I do know that if a 70’s car engine was being overhauled including boring out cylinders, the cylinder and oversize rings would be measured in increments of thousands of an inch i.e. 2 thou over etc.

        Maybe they’ve gone to specifying to the nearest ten thousandth, and no one told me. Well THAT happens all the time. Recently tried to buy the little bracket that holds the electric stove- top elements in place, only to find that you now have to buy a new element which has the bracket welded to it for $39. Have to be on the look out for a sidewalk stove.

    • Memento mori says:

      No hedonistic adjustments should be made to the price if the customer doesn’t have the choice of purchasing the car without those improvements.

      • Swmnguy says:

        Correct. A buyer can always spend more. What matters is whether or not the buyer has an option to spend less.

  3. Jeff says:

    Lenders seem quite skittish lately. I recently applied for a second credit card since we’re doing more traveling and want to avoid foreign transaction fees and just have a backup card in case one is compromised. I got turned down by Capital One. I own a 500k house free and clear, pay my other card off every month, no other debt, no credit blemishes and a FICO score of 805. They said take it up with Experion we just go by what they tell us. I called Experion and the guy looked at my account and actually laughed. He said ” If they won’t give you a card, who are they going to give one to”

    • Willy Winky says:

      ‘pay my other card off every month’

      That’s your problem – they like people who don’t pay their card off :)

      • Claude says:

        madness but true, you are right
        they need you to never paid the debts because if debts are paid /deliveraging it will contribute to implode the debt system we are in
        Debt id THE MONEY
        very high to hyper inflation seems to be our future
        good morning Venezuela
        we are walking on our very sick heads

    • Jeremy says:

      If you travel widely – use Revolut. Incredible.

    • Swmnguy says:

      Capital One uses a bizarre algorithm. My situation is simar to yours, and they won’t raise my credit limit above $1,0000. My wife makes about 1/6th as much as I do, and they’ve raised her limit to about $15k over the past few years without her ever requesting it.

  4. Well, is it Borrower’s greed or Lender’s greed? What’s different now is the bank’s cost of funds. Is 6.25% delinquency a “blow out” or just a new standard, which is still OK when the bank is lending “monopoly money “??

    Another thing that is different now is an economic expansion that has (with the help of unbridled expansion of debt at all levels) not seen two consecutive quarters of contraction for a longer period than ever before. Given no economic hiccup for more than ten years (expansion of stock index values since March 2009) the borrowers of all credit scores have received no regular periodic “spankings “ for their yielding to their debt appetites.

    Through out history, economies with no economic discipline have appeared to grow at a rate that exceeds the product of productivity gains times the increase in working population. In the look back, the excess, beyond the product of productivity and population, is attributable to debt which also expanded.

    Run the clock forward a bit how far can expansion go, with 3.5% unemployment and the working population getting older ? Unless someone can grow the number working and drive the unemployment rate farther toward zero, demand will never grow enough to consume the industrial production of the expanding economy!! The someone’s (central bankers) that drove
    it this far accomplished this feat by making the concept of 40% fixed income and personal savings obsolete.

    So, 3% more delinquency in a game that has 3 or 4 % more margin, than before, is not probably a cause of any acceleration of in banks changing names. It is not a blowout until the little banks start falling like the (relatively) little shale oil and shale gas companies!!

    In O&G the problem was not evident until O&G prices experienced sustained decline and the margins collapsed. In banking it will work, until banks experience sustained increased in costs of capital!!

    • Prairies says:

      Looking through a narrow lens, credit cards and vehicles are the beginning. The concern is if it spreads to larger assets that the stock market is gambling on.

  5. Aussie says:

    Thanks Wolf! They should “skin-alive” the greedy criminal scum, then hang the rodents up a flag pole for all to see as a warning! It’s been done before, it needs to happen again!
    Currently these banker rodents and the CRIMINAL Australian government of whores, along with their whoring criminal Media, are sucking thousands upon thousands of lambs to the slaughter (our sons and daughters, others) and into mortgages that in due time will have a negative value, some possibly 40% lower, and interest rates going through the roof!

    • Mean Chicken says:

      I like this guy.

    • Bill from Australia says:

      Bill from Australia if people are stupid and greedy when the manure hits the fan thy will cry out for government help , people never learn when self responabilty is offloaded to government you have moved to a totalitarian state Australia has become small self centered selfish nation SAD .

      • Broken Clock Capital says:

        People never learn anyway. Man has been living in a dog-eat-dog society for 10,000 years and we still have profligates.

  6. Joe says:

    I wouldn’t want to be a new bank right now.
    Having all the expenses of a business and finding any collateral that is not inflated beyond what is safe and trying to find some paying % greater than inflation.

  7. Aussie says:

    I follow PM prices daily, anybody know why the “opening” is constantly changing daily of late? Have a look at Kitco gold chart today, it shows NO trading for several hours plus! Why?
    Check out todays silver Kitco chart and ponder in amazement of the bullshit being displayed! Just bullshit!
    The US official responsible for this need their fucking heads removed, totally!

    • Tyson Bryan says:

      Gold & silver are still useful parallel currencies. Use these for major capital transactions – house, truck, medical, office etc etc; and the price fixing cabal will gradually lose its grip.
      My younger friends now refer to the USD and other fiat denominations as “spoof paper”.
      It’s our own actions that enable the mass dictated control of valuations to continue.

      • alex in San Jose AKA Digital Detroit says:

        Huge segments of the world’s population consider gold to be the foundation of money. Indians, Chinese, and surprising number of Europeans. I remember a news story from the last crash where a there were vending machines in Germany allowing you to buy little gold bars of a few grams – to take home and hide under your bed, no doubt.

        Silver is a very good way to go, though. Those 90% silver US coins, and other silver coins that are plentiful enough to be known.

  8. Cyclops says:

    Banks that make R.E. Loans or mortgage loans for 30 years fixed rates charge enough interest to completely recover profit by 7 years. While financial illiterates don’t build up equity until year 7 arrives. Why is 7 years so important is because the average American moves to another home for growing family or find a new job city so homeowners lose at the end!
    We all lose at the end financially wise!

    • alex in San Jose AKA Digital Detroit says:

      It’s like a rent-to-own where you never end up owning.

      Real estate as anything other than a forced savings plan and a way to live in a place where you get to chooses what color to paint the kitchen, is an anomaly.

  9. CLN says:

    I think another factor that figures in here is our national culture of reluctance to open up about financial problems and setbacks. Everyone loves to talk — loud and long — about some killer investment that they made, or how they cleaned up and flipped a piece of property, whatever, but just as gamblers never reveal their losses while they boast of their winnings, we never talk to each other about the deals that went south or the bets we lost. So folks spend like mad as long as it’s still possible to do that … and collapse ensues.

    “Back in the day” my parents owned a summer cottage on a lake, near enough to the “winter house” that Dad could commute from either place. So in the summer we “moved” to the lake. But that involved “an actual move”, since we could only furnish the winter house, and that “barely”, and with used furniture and appliances. (Oh, yeah, moved the washer, too, and even a refrigerator once. The “dryer” was a rope in both places. That, we didn’t have to move.) I was a ten-year-old mover. And the “summer house” was a three-room cabin with no heat and no potable running water. Three rooms, not three bedrooms … for a family of seven. (We were rich, I admit, but not by today’s standards of income or shiny possession … or even air conditioning.)

    So what that meant was, they skimped on every-damn-other-thing in order to afford a single great luxury that the family could enjoy together for a quarter of every year. Credit cards? Hell, I might have started to use a credit card before my Dad, I think. “Use it up / Wear it out / Make it do / Or do without.” I think Dad might have written that old New England adage. We just don’t live that way any more, and no one can admit when their lifestyle has outstripped their income and ask for advice or help.

    At least I’ve held off on adding the A/C.

  10. Unamused says:

    What’s Behind the Subprime Consumer Loan Implosion?

    Loan sharking. It never should have been legalised. There were good reasons why it was criminal. Now it’s an industry. A very profitable one, and very good at exploiting unwary and/or desperate customers.

    It was also a mistake to legalise bribery of elected officials, tax evasion, conveyance fraud, extortion, racketeering, and weaponised official falsification, but that is another story and shall be told another time, if I get around to it.

    There isn’t much that can be done about it anyway because most people seem okay with it, so it’s certain to get worse.

    • grifter says:

      USA is a nation of grifters

      Banks pay us what 0.02% on our money, but same bank might charge 20% if your good, and 38% if your bad, and maybe 60% if your sub-prime

      Everybody is grifting everybody, but mostly the hospital and schools, as sickness & kids is an easy grift

      Welcome to ameriKKKa comrade

      • alex in San Jose AKA Digital Detroit says:

        Just a note: In the USSR, loan sharking got you a bullet in the back of the head and your family sent a bill for said bullet.

    • Happy1 says:

      Institutions like banks are greedy but some of the blame must reside with the people who are doing the borrowing. I do volunteer work with the less affluent and am continually astonished by the “champagne taste, beer budget” phenomenon. Especially as it relates to vehicle purchases. I cannot tell you how many people I work with who have purchased 50K new trucks or late model used Rovers on 6-800$ a month payment plans when a 10 year old Grand Caravan would have been sufficient. Greed is a problem with the lenders, but financial illiteracy and vanity are a problem of the lendees.

      • Broken Clock Capital says:

        Agree. Certainly not all struggling folks are profligate, but I’ve seen a lot of similar examples in volunteer work.

  11. Trinacria says:

    So, is this then what is meant by the term “credit exhaustion” ???
    Also, as “black Friday” is tomorrow, I read that a significant amount of folks still have credit card debt related to black Friday of last year. And, as Wolf says, these are the good times! There must be some kind of “reset” coming our way.

    • Frederick says:

      Correct, the reset that should have come our way 10 years ago I just heard that Goldman Sachs is bailing out DB to the tune of 50 billion dollars

      • QQQBall says:

        either that or they are cherry picking the the DB portfolio at deep discount. I don’t see GS as a charitable organization. DB might be selling what they can first to raise capital.

  12. MCH says:

    So, the hedonic quality adjustments of goods sold is partly to blame for the subprime crisis. But does that in turn translates to sectors where hedonic quality adjustments do not exist? For example, the banana I am eating today is functionally no different than the one I consume is 1999. But that is measurably expensive due to inflation.

    I wonder if inflation is added on top of hedonic quality adjustments when it comes to things like cell phones, and cars. I would like to think that it is. But any thoughts on that one?

    • MC01 says:

      The banana you are eating today is genetically exactly the same as the ones you ate in 1999: since 1960 the Grand Nain (AKA ‘Cavendish’ and ‘Chiquita’ banana) has dominated the international trade after the Gros Michel was wiped out by the Panama Disease.
      All Grand Nain banana trees were reproduced using clonal (vegetative) tecniques hence genetical variety is less than minimal, meaning they are all basically the same.

      Grand Nain became so dominant because it was immune to the original strains of the Panama Disease but since the 90’s a new strain, called TR4, evolved which has been making a number on Grand Nain plantations around the world. As all Grand Nain are genetically the same they are all equally vulnerable to TR4.
      Strict quarantine procedures allowed to contain the contagion, but over the past 3-4 years said procedures became lax (the wonders of lobbying) and TR4 has started to spread once again, reaching South America this Summer.

      It’s really hard to say how much banana prices have been affected by good old monetary inflation and how much by TR4 wiping out production on a worldwide scale.
      I’ll spare you the gory details but it’s incredibly hard to obtain seeds from a Grand Nain banana tree, so the chances of producing hybrids that maintain the typical Grand Nain characteristics and are TR4 resistant are slim to say the least.

      It’s likely the whole banana market will change radically over the next decade: whoever will be able to pull a coup like Chiquita did with the Grand Nain will make the proverbial killing.

      • RD Blakeslee says:

        Recruit a few “researchers” from the fake meat movement and manufacture artificial bananas?

        • MC01 says:

          Just be very very very careful when marketing “artificial bananas” and be sure to hire the best attorneys in business when it comes to product liability, misleading marketing and writing disclaimers. :-\

  13. Ole C G Olesen says:

    ” CREDIT”- CARDS are an invention by the DEVIL and his FOLLOWERS

    Any SOUND SOCIETY should FORBID them by LAW

    • Frederick says:

      Doesn’t Christianity and Islam forbid usury( credit cards) officially anyway?

      • alex in San Jose AKA Digital Detroit says:

        Islam and Judaism do. I believe Catholicism does also.

        Christianity as it’s practiced in the US is so far from anything Jesus said, that it’s kind of moot, because it’s not about following what Jesus said, it’s about making money because if you are rich, you are good, and if you are poor, you are bad. Getting money, by any means whether ethical or not, makes you a good person, plain and simple.

        According to American Christianity, that Canadian guy who “invented” insulin and sold the patent for a dollar, is a bad person and probably rotting in Hell now.

      • Broken Clock Capital says:

        Credit (fractional reserve lending) is what creates money, for crying out loud. Just don’t be a halfwit borrower.

        • alex in San Jose AKA Digital Detroit says:

          Unless you know that gold/silver/platinum are money. Then its creation is up to the laws of the universe. Yes, humans can create those elements now but at a stupendous cost.

    • Happy1 says:

      Markets find a way even if the law prohibited usury. Used to be loansharks and such. You would probably not materially help the problem by banning credit cards.

    • robt says:

      If you want to try to make a law, just make it evil and against the law to borrow money from the DEVIL and his FOLLOWERS. Then they would have no supplicants pleading to borrow money from them who would hate them for it the moment after they received it.

  14. David Hall says:

    It might have to do with the worse income inequality since 1929. Some of the top 10% demanded more benefits for the rich and fewer programs for the poor.

    Whether or not strict credit background checks should be performed is debatable.

    • Frederick says:

      The inequality has not declined continuously since 1929 In fact it has accelerated to a huge degree since 1971 when we went off the gold standard Coincidence? I think not

      • c1ue says:

        I would point more towards a political cause: Reagan and his successors, both Democrat and Republican.
        Deregulation and the financialization of the US economy.

        • sierra7 says:

          Bingo….add globalization and you have the picture!
          Enjoy the plunge when it comes!!

  15. marmico says:

    What’s the big deal? None that the data discloses.

    Year over year, seasonally adjusted, the credit card delinquency rate is up 8 basis points to 5.86% and the charge-off rate is down 111 basis points to 6.55%; the total consumer loan delinquency rate is down 5 basis points to 2.03% and the charge-off rate is down 9 basis points to 1.44%.


    • Wolf Richter says:


      What’s the big deal? This is a screenshot of the chart YOU linked. I circled in red what I was talking about. This chart here, which you linked, is “seasonally adjusted.” The data I cited is “not seasonally adjusted.”

      Here is my chart using “not seasonally adjusted data” from the Federal Reserve, which is the data I discussed here

      Both, the charge-off rates (blue line) and delinquency rates (red line) at the 5,000 smaller banks, even on a seasonally adjusted basis have totally blown out, to and past peak Financial Crisis levels.

      Charge-off rates come down recently because initial losses have been charged off and disappear from the charge-off balance and banks are slow to “charge off” their new delinquent loans. But this is a lagging indicator. Look how that panned out during the financial crisis, with delinquency rates stabilizing at high rates and charge-off rates skyrocketing. This is what we can still look forward to.

  16. james wordsworth says:

    By decreasing the “pain of paying”, sellers have sold more and buyers have bought more. Doesn’t mean they can afford it, just that it was easier to do the transaction.

    Of course it is the sellers that have the money to find the bugs in the human software that can reduce the “pain of paying”. Look for example at how easy it is to buy something on Amazon.

  17. historicus says:

    The encouragement to “borrow and spend” to promote economic growth and activity….this is the product.
    Subsidize something (fake low interest rates) and you will get more of that which is subsidized. ie debt.

    • Resjudicata says:

      Shouldn’t we then subsidize hard working families with small children?

      • RD Blakeslee says:

        Personally, I wouldn’t want to be “subsidized” with new small children.

        The wife and I have already raised five of them …

      • 2banana says:

        The federal income tax was sold to the American people as just that.

        1. As a tax on the “rich”

        2. Families with children would pay no income taxes because of the high deductions for children

        And here we are…

  18. Cas127 says:


    Can you give us the source for the differential CC delinq rates between big and small banks?

    The Fed? FDIC?

    My recollection is that big banks overwhelmingly dominate CC lending, so I wonder if the small banks suffer delinq disproportionately bc they are only able to acquire CC borrowers that the Bigs have rejected.

    I agree that the US economy is on a knife’s edge, lulled into an idiotic complacency by interest rate gutting/redistribution – but in the small/big bank delinq dichotomy, I think something else may be going on.

    • Wolf Richter says:


      See charts above.

      The source is the Federal Reserve Board of Governors:


      • Cas127 says:


        Sorry I overlooked the chart – I am working from a small tablet these days and the sourcing got squished.

        Back to the issue at hand – that is a huge pop in a very short time back in 2017.

        I wonder if a regulatory/bank examination change aimed at smaller banks (which I think the Feds would happily see die) accounts for the very, very rapid spike.

        Given that there were about 15k banks in 1990 and just 6k today (with almost no new ones being allowed for years and years), I do think the Feds have a policy of malign indifference to banks with less than a billion in assets.

        It is just easier to regulate/manipulate the money supply via 1000 banks (or 4, cough cough) than via 6000 banks.

        Ask a community banker just how much federal regulators discriminate against them vs. too-plugged-in-to-government-to-fail mega-banks.

        • Wolf Richter says:


          No reason to apologize or blame your tablet. If you look at the time stamp, you will see that I posted the charts hours AFTER you posted your comment. So when you posted your comment, those charts were not there yet :-]

      • Broken Clock Capital says:

        And I’m curious to see volume if loans represented by the 5K “smallest banks” vs “top 100.” I’m guessing top 100 dwarf the 5K.

  19. Old Engineer says:

    Well written article. And Wolfe, your recognition of how people got there makes you one of the good guys. I appreciate your articles and respect your integrity.

  20. Cobalt Programmer says:

    In India, there will be two stores. One is very posh directed towards the rich and affluent upper middle class. Second is targeted towards the lower middle class and poor. They will be selling the same product. Most important thing is, they are OWNED BY THE SAME PERSON. Probably, Big 100 banks, directly or indirectly own these smaller 5000 banks. Only profits go upwards. Losses will be restricted to the small banks. Banks give credit cards to subprime customers anyway because, they will spend it and improve the business. If 0.1% can have it free, the bottom population who works hard but paid less equally deserve the subprime credit.

  21. Julius Baer says:

    I’m only interested in late 2017 – Q1 2018. That’s when this number jumped but it has been stable for nearly 24 months now. What percentage of CC are run by smaller banks, are all smaller banks equally affected, what happened in that exact period? For the rest it would not be smart to stare at this isolated number when all the rest is doing very well.

    • Wolf Richter says:

      The delinquency rates at the 5,000 smaller banks are an indication of how subprime is doing, as I pointed out in the article, because the large banks have the lion’s share of prime-rated customers, and prime is doing very well. The huge prime credit card balances at the largest banks cover up their issues of subprime, and so the data from the largest banks says nearly nothing about subprime. To see subprime, you have to remove prime, and the smaller banks provide that picture.

      Also, as I pointed out, the largest banks can afford to cherry-pick their customers. They take subprime customers, but only the best ones, and their delinquencies are overpowered by the mass of prime customers. The other subprime customers end up at these smaller banks. So that’s where we see the subprime delinquencies come to the surface.

  22. c1ue says:

    Does the data you looked at include credit unions vs. banks?
    I’m curious also as to if this default dichotomy extends across the bank/credit union boundary.

  23. breamrod says:

    .0625 is still low. Wait until it jumps to 15% then lending will cease for all credit card holders regardless of your credit score. then we shall really see the S–t hit the fan!

    • RD Blakeslee says:

      As Wolf has written before: the C.C. market is bifurcated; about 40% (if memory serves me correctly) use them as substitutes for checks, not for extension of credit, and pay off the balance at the end of each billing cycle.

      Interest rates are immaterial for us. Same for the banks; They profit from collecting swipe fees from merchants.

      Wolf’s articles are of as much value to us “non-participants” in the “investment casino” as for anybody else.

      • almost_never_comments says:

        “They profit from collecting swipe fees from merchants.”
        …and selling your purchase history data.

  24. Joe Hill says:

    These are ‘the good times’….. if one is a millionaire.

    For ordinary working people, the Great Recession has never ended, overall employment is still down (despite the fake stats that deliberately don’t count many unemployed people), and wages have never recovered. If anything, wages have barely kept up with inflation, and that’s only if you believe the government and their rigged inflation statistics.

    Yes, these are the good times …. if you are rich, because of course the game is now rigged more towards the rich getting richer in this age where even the Democrats are far-right Reagan Republicans and nobody besides millionaires is in any way ‘represented’ in the government.

    • alex in San Jose AKA Digital Detroit says:

      Real wages and share of the economy have been shrinking for the bottom 90% for something like 50 years. Permanent Depression as far as 90% of us ever experience.

  25. IslandTeal says:

    Morning.. Post Thanksgiving… 2 weeks ago a 3 day stay in a hospital for a cardiac procedure equalled $150K in billing to my insurance company. Makes you think that we have a problem with the the health care system doesn’t it!!

  26. Those people who went subprime a couple years ago, and live at the edge, finally get pushed over by an unseen event. There is plenty of consumer insurance which usually only runs five years. If its five years later and your wages are stuck, and the extended warranty on something ran out, and so did it, you get into a rough patch. I would watch the payday loan business. CC’s cannot be discharged at bankruptcy? (43 wrote that into law) but I don’t know about these PD loans. If I could see the end I would jockey out of that CC debt.

  27. Calm Horizons says:

    “Balances are removed….[by payment or] when the bank “charges off” the delinquent balance against its loan loss reserves.” Well, I for one am not worried about any surprises here. Financial companies would never draw down or understate their reserves in order to boost the bottom line or appear more financially stronger than they actually are. This clearly is the worst it’s going to get, as companies would never keep lending to underwater and effectively insolvent borrowers.

    Besides, we’re in that in-between Thanksgiving and Christmas period when consumers abstemiously pare back their borrowing and pay down their debts. Surely the credit situation couldn’t get worse over the next 26 days?

    Seriously though, how many of those prime borrowers are actually prime? I’ve read about FICO score and other credit score inflation happening over the past several years (a parallel to declining underwriting standards, or declining covenant protections on leveraged loans). Are the big lenders as secure as they appear to be? Is seeing believing?

  28. Augusto says:

    Personally I think this subprime squeeze is just part of the larger squeeze taking place in the economy on working people. Wages are not keeping up with real inflation, and inflation is much higher than CPI. Besides average wage numbers are skewed by outsized increases at the top end of earning scale. However, even lower wage earners need a car to get to work. Subprime for many is not the lender of last resort, but the only lender available to them The Subprime lender knows this and charges all the market will bear.

    • Cas127 says:

      Subprime lenders are responsible for their share of the blame, but it is the policies and PR emanating from DC (for the last 20 yrs) – in the name of an illusory normalcy cultivated to desperately preserve power – that is really to blame.

      Without ZIRP/huge Fed Debts there would be no yield starvation and without yield starvation there would be no buyers of the shit tranches of subprime securitizations.

      And without buyers of the bottom tranches – the subprime market shrinks.

      No shitty originations, no sell repo rinse repeat.

      But that would expose the true distressed state of the US economy – for the last 20 yrs.

      This all ends with veteran politicians crisped on the end of ropes hanging from highway overpasses.

  29. TommyRay says:

    I can’t pass up references to income and inflation…

    The price of a Camry has gone up 25% since 1995 in nominal dollars? Well the bottom quintiles income has gone up nearly 100% in nominal dollars in that time(*) So even the truly very poor have a better ability to purchase that car today then they did 25 years ago. So I don’t see the connection between that specific example and the need for subprime credit outside of changing expectations of what people want.

    Health insurance also is really no different for the very poor due to Medicaid, CHIPS etc over that time period.

    Personal opinion is that things like increased bundling of subprime credit into CDOs and changing bankruptcy laws in 2005 contributed substantially to increasing the risk. People always wanted more credit it’s just the access to it has expanded dramatically independent of their income or the price of goods to buy.

    (*) source Census Bureau Historical income Table for Households

    • alex in San Jose AKA Digital Detroit says:

      My income has not gone up, in absolute or adjusted dollars, since 1995.

      Hell back in 1995 I could own a car; now I’d be very foolish to think I could afford any motorized vehicle.

      And I’m doing really well for my area.

  30. Tommyboy says:

    I wonder if negative amortization which increases a loans outstanding balance by rolling unpaid interest into it, and negative equity which increases a loans principle by rolling a previous loans unpaid balance into it, have anything to do with this situation. Negative and near zero amortization is causing problems with big ticket student loans, which according to Bloomberg:


    “though they’re meeting their $1,300 in required monthly payments, their balance has remained roughly the same over the last year because Vicky’s outlay doesn’t cover all of the interest on her loans. For all their education and career success, the Wilsons can’t envision repaying their school debts—ever. And forget about buying a home or opening a college fund for their 3-year-old son. “We don’t even think about it,” Jon says”

    Negative equity is causing similar problems with auto loans, which according to the WSJ:


    “Some 33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity, compared with 28% five years ago and 19% a decade ago, according to car-shopping site Edmunds. Those borrowers owed about $5,000 on average after they traded in their cars, before taking on new loans.”

    Increasing a loans principle in these ways will increase the outstanding balance upon which a borrowers interest and monthly loan payments are calculated, and they can extend a loans maturity out indefinitely. I would be interested to know how many delinquent subprime borrowers have large outstanding loan balances in these principal accumulating categories.

  31. CreditGB says:

    40 years in credit management here. We avoided “sub prime” because they were…..sub prime…..we called them by other names. Truly nice people, but without the means to repay, they default. If you don’t have 2x collateral, you are screwed.

    • Cas127 says:


      But now (for last 20 yrs or so) credit originators can make loans to bad risks, package them together for fees, sell them off to yield starved investors – who haven’t been burned enough to learn the term adverse selection, and offload almost all credit origination risk to the market.

      If it weren’t for crap credit originations there might be 12 million cars sold in US each yr instead of 17 – which is a crap number itself – showing zero growth since 1997.

  32. Setarcos says:

    World Acceptance provisioned $53 million for loan losses last quarter on $838 million in loans. 4 quarters of this results in $1 of every $4 in loans being charged-off. They have lost hundreds of millions in market cap in the last 6 months.

    Lending money to sub-prime borrowers is certainly not for the faint at heart.

  33. Setarcos says:

    “They’re now conditioned to take whatever they can get.“

    Unlike 99% of the content here, this is sheer Nonsense…and on more than 1 level.

    Repeatedly being denied a favorable outcome would condition a typical subject to stop trying. They’re conditioned to take whatever they can get for a much more obvious and fundamental reason – they are motivated by their desire for the money. Their motivation was not created by someone else, so no external “conditioning” is necessary.

    And so they are willing to repeatedly (using your conditioning example) seek out anyone that will take the risk of giving them money in exchange for a promise to repay. They have already demonstrated they did not honor a past or current promise to repay.

    The best way to stop being an alcoholic is to stop drinking. The best way to stop being sub-prime is to honor your promise to repay your loans. When a bar tender refuses to serve you, they are not conditioning you to seek out another bar.

    Get to know some of the people

    They were turned down because the lenders calculated that the loan would not be profitable. If the loan was profitable, lenders will fall all over themselves trying to make the loan.

    Why is the loan not profitable? The probability of a default. Why is the probability of default high? Because they failed to repay other lenders.

    • Wolf Richter says:


      “Get to know some of the people”

      Well, I know “some of the people.” In fact, some time ago, such a person kept missing work because her old clunker kept breaking down. She was cleaning homes, including mine, and was independent. She needed her car in order to work and make money. So one day, after her car broke down again and she didn’t even have the cash to get it fixed, and she couldn’t work because she didn’t have a car, I picked out a basic new car for her, and I personally guaranteed the loan because it was the only way to get it approved. So she got low-cost financing on a basic new car, and the interest rate was low too because it was based on my credit. And the payment was therefore also low and within her range. This person never missed a payment, and never missed work again due to car problems. Problem solved.

      “Subprime” isn’t a personality disorder. It’s a credit problem and a financial issue. And not everyone can be thrown into the same bucket.

      • IslandTeal says:

        Getting to know and helping someone is good. I’ve had both experiences.
        Enjoy the holidays and thank you for your research and work.

  34. Zheega says:

    Don’t the banks have to approve credit cards, with spending limits set by those very same banks, BEFORE “greedy consumers” can max out those credit cards? I can’t see how this isn’t 100% on the banks themselves.

    There can’t be overborrowing without overlending.

  35. Broker Dan says:

    The last 2 yrs, mortgage lenders have tightened up cash out lending.

    Fannie, Freddie, FHA and VA have all cut their guidelines and toughened up on cash out loans. Wonder if this change has pushed these borrowers into the arms of these credit card and personal loan companies?

  36. Leser says:

    Great explanation of “hedonistic adjustments” – this should have a maximum audience so people can appreciate the duplicity in the central banks’ complaint that inflation were “too low” and the printers need to be cranked up to ever insaner levels.
    Thanks for the podcast transcripts, too.

  37. Lisa_Hooker says:

    At some point in the late ’70s folks attitude changed from living by their balance sheet to spending by their cash flow. The balance sheet tells you where you’re at at all times. Cash flow is much, much more variable and dependent on work, medical condition, unexpected losses, etc. As Wolf repeatedly points out, adverse cash flow events can escalate quickly to catastrophe. How many sub-prime borrowers understand this?

    • Old-school says:

      I agree. I think it’s hard for individuals to overcome the marketing power of corporations including banks. I like Dave Ramsey’s program for getting out of debt, but as a society we could do a better job giving young people a better template for lifetime financial success. It’s unbelievable that someone could get a college degree without at least one required course on personal finance.

    • Jdog says:

      Good point. In addition, balance sheets are now much more vulnerable due to the fact most peoples wealth is concentrated in home equity and 401K’s, both of which at this time are speculative assets experiencing inflated valuations.

  38. Lisa_Hooker says:

    Another thought – would you buy a steak at the butcher’s if it were labeled “sub-prime.” I mean for your own consumption. ;-)

  39. Demetrious says:

    “Apartments and used car prices are getting a lot more expensive. Wage levels have not risen for a long time…”

    Thought experiment; without the presence of illegals in our country, how much lower would low end apartment rentals be?
    How about the price and availability of used cars?
    How much more could employees get by going on strike to demand a larger share of the pie without the safety valve to employers of cheap labor illegals and legal immigrants?

    How would open borders, or wholesale legalization of illegals in the U.S. and those to come, affect the price of apartments, used cars and the ability of employees to strike and obtain higher wages?

  40. Jdog says:

    This all boils down to a simple concept, that seems to have been lost in the past years and that is moral hazzard. The term was last examined back in 2008, when a few people with forward thinking could see the outcome of rewarding people who should have been loosing money for bad decisions by bailing them out and rewarding them instead.
    Moral hazard in its simplest form is simply rationality. When we see people with sub prime credit irrationally alowing greed to dictate their decisions,
    then to outcome is inevitible.
    What we see today is that the irrationality of moral hazzard has become the rule instead of the exception. When that becomes the case, the only outcome possible is deflation and recession.

  41. cd says:

    DTI is huge issue, Subprime risk needs more yield to help balance deficiencies and in todays fed induced hopium rates, they just don’t get it….

    credit card use is set to begin waning with debit installment loans creeping into all verticals…

  42. Bert Schlitz says:

    Capitalism is the debt based system. The cycle has simply run its course. This one is more S&L variety rather than mortgage bubble.

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