Guest Post: "Breaking Bad (Debt), by Jim Quinn

Two weeks ago, Jim Quinn wrote a definitive, four-part series on "The Fourth Turning" and the works of Strauss and Howe. Jim is back this week with a comprehensive, three-part expose on the looming, continued debt crisis and how this unsustainable system is certain to crash again in the near future.

We talk about it all the time here in Turdville...The End of The Great Keynesian Experiment. A world awash in debt, where the levels of debt are now so high that they have become unserviceable. Instead of ending this cycle after The Great Financial Crisis of 2008, the central bankers and politicians instead doubled down or, as Jim puts it below:

"The consequences of this debt bacchanalia should have been the orderly liquidation of the Wall Street entities that created the crisis, the writing off of trillions in bad debt, corporate and personal bankruptcies of businesses and people who borrowed recklessly, a sharp steep economic decline to cleanse the excesses, and politicians who immediately began the process of reducing budgets and addressing long term unfunded unpayable liability promises. Instead, the psychotic oligarchs did not want to lose any of their power, wealth or control over the proletariat. They have done the exact opposite of what needed to be done. You must deleverage to solve a crisis caused by excessive debt. The oligarchs have succeeded in further raping and pillaging the working class, but have only delayed the final reckoning and guaranteed a debt apocalypse when their futile schemes fail again. And fail they will."

Please take the time to read this extremely important series of essays. Jim lays out in detail how the seeds of the next financial crisis have already been sown...and this next crisis will very likely be the one that finally brings about the end game.

TF

BREAKING BAD (DEBT)

by, Jim Quinn

“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

“Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.”James Grant, Grant’s Interest Rate Observer

The Federal Reserve issued their fourth quarter Report on Household Debt and Credit last week to the sounds of silence in the mainstream media. There were minor press releases issued by the “professional” financial journalists regurgitating the Federal Reserve’s storyline. Actual analysis, connecting the dots, describing how the massive issuance of student loan and auto loan debt has produced a fake economic recovery, and how the accelerating default rates in auto loans and student loans will produce the next subprime debt implosion, were nowhere to be seen on CNBC, Bloomberg, the WSJ, or any other status quo propaganda media outlet. Their job is not to analyze or seek truth. Their job is to keep their government patrons and Wall Street advertisers happy, while keeping the masses sedated, misinformed, and pliable.

Luckily, the government hasn’t gained complete control over the internet yet, so dozens of truth telling blogs have done a phenomenal job zeroing in on the surge in defaults. The data in the report tells a multitude of tales conflicting with the “official story” sold to the public. The austerity storyline, economic recovery storyline, housing recovery storyline, and strong auto market storyline are all revealed to be fraudulent by the data in the report. Total household debt grew by 7 billion in the fourth quarter and 6 billion for the all of 2014. Non-housing debt in the 4th quarter of 2008, just as the last subprime debt created financial implosion began, was .71 trillion. After six years of supposed consumer austerity, total non-housing debt stands at a record .15 trillion. This is after hundreds of billions of the .71 trillion were written off and foisted upon the backs of taxpayers, by the Wall Street banks and their puppets at the Federal Reserve.

The corporate media talking heads cheer every increase in consumer debt as proof of economic recovery. In reality every increase in consumer debt is just another step towards another far worse economic breakdown. And the reason is simple. Real median household income is still below 1989 levels. The average American family hasn’t seen their income go up in 25 years. What they did see was their chains of debt get unbearably heavy. Non-housing consumer debt (credit card, auto, student loan, other) was 0 billion in 1989.

The 300% increase in consumer debt, while incomes stagnated, has created a zombie nation of debt slaves. And this doesn’t even take into account the quadrupling of mortgage debt from .2 trillion in 1989 to .7 trillion today. This isn’t Twelve Years a Slave; it’s Debt Slaves for Eternity. And who benefits? The Wall Street bankers, .1% oligarchs, and corporate fascists pulling the levers of government and society benefit. An economic and jobs recovery for working Americans is nowhere to be seen in the chart below.

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Total debt on the balance sheet of American consumers (formerly known as citizens) now tops .8 trillion, up from the .1 trillion trough in 2013. The peak was “achieved” in a frenzy of   Image cannot be displayed

{If you think the subprime borrowers in the auto market are high risk, you haven’t seen anything yet. In Part Three of this article I’ll address the student loan debacle and the coming worldwide debt implosion which will change the world forever.}

In Part One of this three part article I laid out the groundwork of how the Federal Reserve is responsible for the excessive level of debt in our society and how it has warped the thinking of the American people, while creating a tremendous level of mal-investment. In Part Two I focused on the Federal Reserve/Federal Government scheme to artificially boost the economy through the issuance of subprime debt to create a false auto boom. In this final episode, I’ll address the disastrous student loan debacle and the dreadful global implications of 0 trillion of debt destroying the lives of citizens around the world.

Getting a PhD in Subprime Debt

“When easy money stopped, buyers couldn’t sell. They couldn’t refinance. First sales slowed, then prices started falling and then the housing bubble burst. Housing prices crashed. We know the rest of the story. We are still mired in the consequences. Can someone please explain to me how what is happening in higher education is any different?This bubble is going to burst.” Mark Cuban

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Now we get to the subprimiest of subprime debt – student loans. Student loans are not officially classified as subprime debt, but let’s compare borrowers. A subprime borrower has a FICO score of 660 or below, has defaulted on previous obligations, and has limited ability to meet monthly living expenses. A student loan borrower doesn’t have a credit score because they have no credit, have no job with which to pay back the loan, and have no ability other than the loan proceeds to meet their monthly living expenses. And in today’s job environment, they are more likely to land a waiter job at TGI Fridays than a job in their major. These loans are nothing more than deep subprime loans made to young people who have little chance of every paying them off, with hundreds of billions in losses being borne by the ever shrinking number of working taxpaying Americans.

Student loan debt stood at 0 billion when Obama was sworn into office in 2009. The official reported default rate was 7.9%. Obama and his administration took complete control of the student loan market shortly after his inauguration. They have since handed out a staggering 0 billion of new loans (a 76% increase), and the official reported default rate has soared by 43% to 11.3%. Of course, the true default rate is much higher. The level of mal-investment and utter stupidity is astounding, even for the Federal government. Just some basic unequivocal facts can prove my case.

There were 1.67 million Class of 2014 students who took the SAT. Only 42.6% of those students met the minimum threshold of predicted success in college (a B minus average). That amounts to 711,000 high school seniors intellectually capable of succeeding in college. This level has been consistent for years. So over the last five years only 3.5 million high school seniors should have entered college based on their intellectual ability to succeed. Instead, undergraduate college enrollment stands at 19.5 million. Colleges in the U.S. are admitting approximately 4.5 million more students per year than are capable of earning a degree. This waste of time and money can be laid at the feet of the Federal government. Obama and his minions believe everyone deserves a college degree, even if they aren’t intellectually capable of earning it, because it’s only fair. No teenager left behind, without un-payable debt.

According to down McMansion buying, Lexus leasing, and Home Equity ATM extraction in 2008, when the total reached .7 trillion. The .6 trillion decline from peak insanity had nothing to do with austerity or Americans reigning in their debt financed lifestyles.

The Wall Street banks took the 0 billion of taxpayer funded TARP, sold their worthless mortgage paper to the Fed, suckled on the Fed’s QE and ZIRP, and wrote off the .6 trillion. Wall Street didn’t miss a beat, while Main Street got treated like skeet during a shooting competition. Every solution proposed and implemented since September 2008 had the sole purpose of benefitting the criminals on Wall Street who perpetrated the largest financial heist in world history. The slogan should have been Bankers Saving Bankers Since 1913.

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The average American benefited in no way from the government/banker bailout. Their wages have deteriorated, their daily living expenses have risen, Obamacare has resulted in higher healthcare premiums, higher co-pays, more part-time jobs, less full-time jobs, and less healthcare choices for the working class, while Wall Street generates billions in risk free profits, bankers and corporate executives reap massive million dollar bonuses, and the .1% parties like its 1999. Rising wealth inequality has been systematically programmed into our economic system by bankers and their bought off puppet politicians in Washington D.C. – Corporate fascism at its finest.

The lack of real economic recovery for the average American has been purposely masked through the issuance of 0 billion of subprime student loan debt and 0 billion of auto loan debt (much of it subprime) since 2010 by the Federal government and their co-conspirators on Wall Street.

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The issuance of debt by the government to people not financially able to repay that debt, in order to generate economic activity and boost GDP is nothing more than fraudulent inducement using taxpayer funds. Debt financed purchases is not wealth. Debt financed consumption does not boost the wealth of the nation. If adding debt produced economic advancement, why has the number of Americans on food stamps escalated from 33 million in 2009 to 46 million today during a five year economic recovery? Why have 10 million Americans left the labor force since 2009, pushing the labor participation rate to 30 year lows, during a jobs recovery?

Why have social benefits distributed by the Federal government surged by .5 trillion since 2012, reaching a record high of 20.8% of real disposable income? It resides 33% above 2007 levels and still above levels during the depths of the recession in 2009. But at least the stock market hits record highs on a daily basis, creating joy in NYC penthouse suites and Hamptons ocean front estates. American dream for the .1% achieved.

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Does this look like Recovery?

When you actually dig into the 31 page Federal Reserve produced report, anyone with a few functioning brain cells (this eliminates all CNBC bimbos, shills, and cheerleaders), can see our current economic paradigm is far from normal and an economic recovery has not materialized. Record stock market prices and corporate profits have not trickled down to Main Street. Janet, don’t piss down my back and tell me it’s raining (credit to Fletcher in Outlaw Josey Wales). The mainstream media spin fails to mention that 6 billion of consumer debt is currently delinquent. That is 6% of all consumer debt.

Could the Wall Street banks withstand that level of losses with their highly leveraged insolvent balance sheets? The number of foreclosures and consumer bankruptcies rose in the fourth quarter versus the third quarter. Does this happen during an economic recovery? Donghoon Lee, research officer at the Federal Reserve Bank of New York, may be looking for a new job soon. When a Federal Reserve lackey actually admits to being worried, you know things are about to get very bad very fast.

“Although we’ve seen an overall improvement in delinquency rates since the Great Recession, the increasing trend in student loan balances and delinquencies is concerning. Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.”

And he didn’t even mention the increase in auto loan delinquencies which will eventually morph into a landslide of bad debt write-offs, repossessions, and Wall Street bankers demanding another bailout. The pure data in the Fed report doesn’t tell the true story. The 6 billion increase in outstanding debt only represents a 2.7% annual increase. And even though mortgage debt increased by 1 billion, it was on a base of .17 trillion. That is a miniscule 1.5% increase. A critical thinking individual might wonder how national home prices could rise by 25% since the beginning of 2012, while mortgage debt outstanding has fallen by 0 billion over this same time frame, and mortgage originations are hovering at 1997 levels.

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It couldn’t have been the Wall Street/Fed/Treasury Dept. withhold foreclosures from the market, sell to hedge funds and convert to rental units, and screw the first time home buyer scheme to super charge Wall Street profits and artificially boost home prices. Could it? New home sales prices and new home sales were tightly correlated from 1990 through 2006. Then the bottom fell out in 2006 and new homes sales crashed. Nine years later new home sales still linger at 1991 recession levels. New home sales are 65% lower than they were in 2005, but median prices are 20% higher. This is utterly ridiculous.

If prices had fallen to the 0,000 to 0,000 level, based on the historical correlation, first time home buyers would be buying hand over foot. But the Federal Reserve, their Wall Street owners, connected hedge funds, and the Federal government has created an artificial price bubble with 0% interest rates and trillions of QE heroin. The 1% can still afford to buy overpriced McMansions, but the young are left saddled with student loan debt, low paying service jobs, and no chance at ever owning a home.

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The chart that puts this economic recovery in perspective is their 90+ days delinquent by loan type. If you haven’t made a payment in 90 days or more, the odds are you aren’t going to pay. The Fed and the ever positive corporate media, who rely on advertising revenue from Wall Street, the auto industry, and the government, go to any lengths to spin awful data into gold. Their current storyline is to compare delinquency levels to the levels in 2009 at the height of the worst recession since the 1930s. Mortgage delinquencies have fallen from 8.9% in 2010 to 3.2% today (amazing what writing off trillion of bad mortgages can achieve), but they are three times higher than the 1% average before the financial meltdown. Is that a return to normalcy? Home equity lines of credit had delinquency rates of 0.2% prior to the 2008 meltdown. Today they sit at 3.2%, only sixteen times higher than before the crisis. Is that a return to normalcy? Do these facts scream “housing recovery”?

The outlier on the chart is credit card delinquencies. The normal, pre-crisis level hovered between 9% and 10%. Banks can handle that level when they are charging 18% interest while borrowing at .25% interest. During the Wall Street created recession, delinquencies spiked to 13.7%, but after writing off about 0 billion of bad debt and closing 100 million credit card accounts, delinquencies miraculously began to plunge. Delinquencies have plunged to 7.3% as credit card debt still sits 0 billion below the 2008 peak. This is a reflection of Americans depending on their credit cards to survive their everyday existence.

With stagnant real wages and household income 7% below 2008 levels, the average family is using their credit cards to pay for food, energy, clothing, utilities, taxes, and medical expenses. They are making the minimum payments and staying current on their payment obligations because their credit cards are the only thing keeping them from having to live in a cardboard box. A Bankrate.com survey this week revealed 37% of Americans have credit card debt that equals or is greater than their emergency savings, leaving them “teetering on the edge of financial disaster.” Greg McBride, Bankrate.com’s chief financial analyst sums up the situation:

“Not only do most of them not have enough savings, they’ve all used up some portion of their available credit — they are running out of options. People don’t have enough money for unplanned expenses, and if they have more credit card debt than emergency savings, it’s a double whammy. In the event of unplanned expenses, their options are limited.”

Who doesn’t have an unplanned expense multiple times in a year? A major car repair, appliance repair, hot water heater failure, or a medical issue is utterly predictable and most people are unprepared to financially deal with them. As many people found in 2009, credit card lines can be reduced in the blink of an eye by the Wall Street banks. This potential for financial disaster is why Americans are doing everything they can to stay current on their credit card payments. That brings us to the Federal Reserve/Federal Government created mal-investment subprime boom 2.0, which is in the early stages of going bust.

{I’ll address the Subprime bust 2.0 in Part Two of this article.}

‘If you’re committed enough, you can make any story work. I once told a woman I was Kevin Costner, and it worked because I believed it’ Saul Goodman – Breaking Bad

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“As calamitous as the sub-prime blowup seems, it is only the beginning. The credit bubble spawned abuses throughout the system. Sub-prime lending just happened to be the most egregious of the lot, and thus the first to have the cockroaches scurrying out in plain view. The housing market will collapse. New-home construction will collapse. Consumer pocketbooks will be pinched. The consumer spending binge will be over. The U.S. economy will enter a recession.”Eric Sprott – 2007

In Part One of this article I provided the background of how our current debt saturated economy got to this point of ludicrousness. The “crazy” bloggers, prophets of doom, and analysts who could do basic math were warning of an impending financial crisis in 2006 and 2007, which would be caused by the issuance of hundreds of billions in subprime slime by the Too Big To Trust Wall Street shysters. Subprime mortgages, auto loans, and credit card lines provided the kindling for the 2008 conflagration.

Under normal circumstances we wouldn’t have seen such irrational, reckless, greedy behavior from Wall Street for another generation. But, Wall Street didn’t have to accept the consequences of their actions. They were bailed out and further enriched by their puppets at the Federal Reserve, the lackey politicians they installed in Washington D.C., and on the backs of honest, hard-working, tax paying Americans. The lesson they learned was they could continue to take excessive, reckless, unregulated risks without concern for losses, downside, or consequences.

In reality, the Fed and government have worked in tandem with Wall Street to create the subprime economic recovery. The scheme has been to revive the bailed out auto industry by artificially boosting sales through dodgy, low interest, extended term debt. With the Feds taking over the entire student loan market, they have doled out hundreds of billions to kids who don’t have the educational skills to succeed in college, in order to keep them out of the unemployment calculation.

That’s why you have a 5.7% unemployment rate when 41% of the working age population (102 million people) is not working. The appearance of economic recovery has been much more important to the ruling class than an actual economic recovery for average Americans, because the .1% have made out like bandits anyway. Who has benefited from the 0 billion of student loan and auto debt disseminated by the oligarchs in the last four years, the borrowers or lenders?

The Fed chart that reveals how warped the economy has become in the last few years is the one showing number of loan accounts by type over the last twelve years. For the first decade, the number of mortgage loans was greater than auto loans by a significant margin. Since the beginning of 2013 the number of auto loans has soared past the number of mortgage loans. And this happened during a supposed housing recovery. Have people decided living in a car is a better deal than living in a home? Why the surge in auto loan accounts?

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The avalanche of auto loans was initiated by the Obama administration and their fully controlled bankrupt finance company Ally Financial (formerly known as the upstanding subprime lenders GMAC, Ditech, ResCorp) after the American taxpayer handed them billion of TARP. The Feds took control of Ally in early 2009 and decided to maintain control of this entity longer than any other TARP recipient, until 2014. I wonder why?

As the biggest lender in the auto space and main lender for bailed out automakers GM and Chrysler, doling out high risk loans to boost auto sales would make Obama look like a genius for saving GM and keeping their union workforce voting Democrat. The Wall Street banks couldn’t let Ally Financial capture all the easy profits. The Fed’s ZIRP gave the green light for auto lenders to borrow billions at 0% and lend it out to anyone who could fog a mirror. And they have. When you borrow at 0% and lend to deadbeats at 10%, you can deal with substantial losses knowing you always have the Yellen Put when things blow sky high.

The Fed report downplayed the 13% surge in seriously delinquent auto loans in one quarter, from 3.1% to 3.5%. This is just the seriously delinquent loans and amounts to billion. The chart below paints a dire picture of the future. The financial industry originated 2 billion of new auto loans in the fourth quarter, but billion entered delinquency status. That is almost 20%. During 2012 this percentage was closer to 12%, as only billion entered delinquency status. I wonder if the tripling in issuance of subprime auto loans since 2009 has anything to do with the delinquencies. Subprime auto loan issuance has swelled from 20% of all loans in 2009 to north of 30% and are approaching the pre-disaster era of 2006. Auto loans to consumers rated below prime comprised 38.7% of all outstanding loans as of the third quarter 2014. We all know how the last subprime boom worked out. The NYT sums up the current situation:

More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008 [and] more than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November [also] the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.

Think about that for a second. One out of twelve subprime auto loan borrowers was delinquent on their payments in the first nine months of their loan. I guess they thought they could use their SNAP card for car payments. Let them eat Cadillac Escalades.

The auto loan delinquency rates reported by the Fed, captured credit reporting agencies (Experian, Equifax), and the corporate mainstream media dramatically underestimates the true picture. In a scathing recent report, The Center for Responsible Lending dismantles the positive storyline being spun by the purveyors of propaganda at the Fed and their Wall Street owner peddlers of debt. Some pertinent facts in the report are as follows:

  • The dollar value of originations to people with credit scores below 660 has roughly doubled since 2009, while originations for the other credit score groups increased by only about half. Likewise subprime auto loan securitization issuances stood at $13.7 billion in 2013, more than 12 times the issuance since 2009.
  • In every quarter since 3Q 2013, repossession rates have been significantly higher than the same quarter in the previous year. Most alarming, the 2Q 2014 repossession rate was 70% higher than 2Q 2013.
  • The speed of repossession also creates an environment where a spike in the repossession rate can occur without a parallel spike in seriously delinquent accounts. Lenders can initiate repossession if they believe the collateral is under threat. As such, it is very likely that as signs of a deteriorating market become clear, lenders accelerate repossession at an earlier point in delinquency. In many markets, a rise in delinquencies serves as a harbinger of potential defaults. In this market, delinquency rates can remain artificially low due to the quick repossession process.
  • Lenders routinely allow dealers to make loans that exceed the value of the car. LTV ratios above 100% allow a dealer to finance additional insurance products, such as extended warranties and credit insurance policies. Higher LTV ratios also allow dealers to finance “negative equity”, which is the amount that is still owed when a trade – in vehicle is worth less than the outstanding balance of the loan on the trade – in.
  • To make monthly payments seem affordable on larger auto loans, lenders are extending loan terms to as long as 96 months. Longer loan terms result in the borrower owing more than the car is worth for the bulk of the loan term. The Office of the Comptroller of the Currency (OCC), which regulates national banks, recently warned that, “The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure.”

The Federal Reserve used to report on a monthly basis regarding the average LTV, maturity, and average amount financed for all car loans. They abruptly stopped reporting this info as of 2012, just as the subprime auto boom launched. They have provided no rational for stopping this reporting. The data is readily available and the Center for Responsible Lending details the data in their report. It’s clear why the Fed doesn’t want to provide the data – because it proves how outrageously reckless the banks have become under the Fed’s regulatory reign of nonchalance. The last time the Fed reported this data in 2011, here was the data:

Average Loan to Value Ratio – 80%

Average Maturity – 62.3 months

Average Amount Financed – $26,673

That was then. This is now:

Average Loan to Value Ratio – 110.4%

Average Maturity – 65 months

Average Amount Financed – $27,430

It is mind bogglingly ludicrous for financial institutions to loan 110% of the value of a vehicle over a seven year term when the vehicle depreciates by 10% the moment you drive it off the lot and 50% in the first three years. It is even more preposterous for these financial institutions to loan 126% of the value of a vehicle for 71 months at 10% interest to someone without the means, income, or willingness to repay the loan. But, these are the current terms offered to subprime borrowers. Would a rational lender who followed basic risk management methods ever make such a high risk loan, without trusting the Federal Reserve will rescue them when these loans blow up in their face? Could this massive mal-investment occur if the Fed’s QE and ZIRP monetary policies were not propping up Wall Street? Not a chance. So, we know who wins. But who loses?

Subprime loans are used by sophisticated Ivy League educated MBA bankers to lure over-indebted, lower income, lower educated, easily manipulated Americans with bad credit (they’ve defaulted before), into high interest auto loan debt with promises of easy payments on their very own luxury SUV. It’s like Christmas has arrived and Ally Financial is Santa Claus. The longer the term, higher the loan amount, and the higher the interest rate, the better for the lender – because the lender isn’t bearing the risk. Sound familiar? It’s back.

The subprime loan securitization market is booming again. Who cares if Ally, GM Financial, and a slew of other subprime lenders are under investigation by the DOJ for the underwriting criteria they used on securitized subprime auto loans as well as the representations and warranties related to these securitizations. Private equity firms are filling the yield gap with good old fashioned slicing and dicing of subprime auto loan tranches – and get this – many rated AAA by the upstanding rating agencies S&P and Moodys. How could this possibly go wrong?

It seems Blackstone isn’t only the lead player in the buy to rent housing price scheme, but they are a major player in the subprime auto loan scheme. Wolf Richter explains:

Subprime auto lender Exeter Finance, which PE firm Blackstone Group bought in 2011, exploded its portfolio from $150 million to $2.8 billion in three years. It has now become America’s third-largest issuer of subprime auto-loan structured securities. It too received subpoenas from the DOJ and other agencies. And it has been losing money for three years. American Banker took a look at a $500-million securitization the company sold last August and found a doozy:

The average APR on those loans was 18.59%. The original term length was 70 months. 75% of these loans had a loan-to-value ratio of over 105%. Eighty-one percent of the borrowers had a FICO score of below 600. And yet some of the securities that these loans are turned into are rated AAA.

The desperate reach for yield in a zero interest rate environment created by the Federal Reserve has generated this latest subprime disaster in the making. The Federal Reserve’s only tool is to create new bubbles when their old bubbles cause hundreds of billions in damage to the real economy and real people. These toxic subprime auto loan securities are being bought by pension funds, life insurance companies, and mutual funds in a frantic effort to reach their yield goals when 10 Year Treasuries yield 2%. When it all goes to hell, little old ladies, pensioners, and conservative investors will be screwed again. It’s so clear, even the Fed can see it coming.

At lower-rated and unrated nonfinancial businesses, however, leverage has continued to increase with the rapid growth in high-yield bond issuance and leveraged loans in recent years… new deals continue to show signs of weak underwriting terms and heightened leverage that are close to levels preceding the financial crisis.Federal Reserve Quarterly Report

We are in a World of Debt

“After the 2008 financial crisis and the longest and deepest global recession since World War II, it was widely expected that the world’s economies would deleverage. It has not happened. Debt continues to grow. Since 2007, global debt has grown by trillion, raising the ratio of debt to GDP by 17 percentage points.”McKinsey

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It seems McKinsey is making the mistake of thinking like a logical sentient human being, rather than intellectually dishonest central bankers, criminally psychotic Wall Street CEOs, greedy myopic mega-corporation CEOs, or captured cowardly politicians. In a world run by honest, intelligent, rational people who cared about the long-term sustainability of our economic system, the actions taken after the 2008 debt fueled implosion would have been far different than the actions taken by the psychopathic, greedy, ego maniacal, hubristic moneyed interests over the last six years.

The 2008 worldwide financial crisis was produced due to excessively easy monetary policy, which caused the largest debt driven mal-investment in housing, automobiles, and Chinese produced crap in world history. It was done purposely by a uber-wealthy ruling class who call the shots, rig the game, reap the benefits, and deny responsibility when their machinations create havoc and suffering across the globe for the masses.

The consequences of this debt bacchanalia should have been the orderly liquidation of the Wall Street entities that created the crisis, the writing off of trillions in bad debt, corporate and personal bankruptcies of businesses and people who borrowed recklessly, a sharp steep economic decline to cleanse the excesses, and politicians who immediately began the process of reducing budgets and addressing long term unfunded unpayable liability promises. Instead, the psychotic oligarchs did not want to lose any of their power, wealth or control over the proletariat. They have done the exact opposite of what needed to be done. You must deleverage to solve a crisis caused by excessive debt. The oligarchs have succeeded in further raping and pillaging the working class, but have only delayed the final reckoning and guaranteed a debt apocalypse when their futile schemes fail again. And fail they will.

Arrogant condescending central bankers, narcissistic Wall Street psychopaths, crooked bought off politicians, and narrow-minded government apparatchiks across the developed world have colluded to add trillion of additional debt to the existing Himalayan Mountain of unpayable debt we started with in 2008. We’ve entered the NIRP phase of the currency debasement race for the bottom.

Households throughout the developed world have acted in a relatively rational manner by paying down credit card debt and attempting to live within their means, because their real wages continue to decline and they are receiving no return on their savings. The moneyed interests continue to prey on the desperate and financially ignorant in their last ditch desperate attempt to loot the remaining treasure from the U.S.S. Titanic, hijack the remaining lifeboats, and leave the American people to sink into the frigid murky depths.

Corporate titans have added trillion of debt as they take on debt to buy back their overpriced stock, artificially enhancing earnings per share and boosting their own compensation packages. Investing in their business is passé. We’ve entered a new paradigm where driving your stock price higher is all that matters to the Ivy League MBA executives. The Financial sector has shifted most of their toxic debt onto the Federal Reserve balance sheet and the backs of the American taxpayer.

The governing bodies of Japan, the EU, and the US have accounted for the vast majority of the trillion increase in debt by the government sector. Total world debt as a percentage of World GDP is now approaching 300%. In 2000, the percentage was 185%. This level of debt can’t be sustained at zero interest rates, let alone normalized rates of 5%. Something that can’t be sustained won’t be. It is mathematically impossible for 0 trillion of debt to ever be repaid. It’s just a question of who gets screwed. And if the moneyed interests have their way, it’ll be you.

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Everyone loves a boom. The party from 1996 to 2000 was a blast. Remember your moronic brother-in-law boasting about getting rich day trading. The bust was a bummer and your brother-in-law had to get a job at Wendy’s. The highly educated academics at the Fed couldn’t allow the pain or consequences to last. They made it their sole responsibility to create another boom from 2003 to 2008. It was a real doozy. The hangover afterwards was going to be epic.

The party should have been over, but Ben and Janet know better than the rest of us. Ben is a self-proclaimed expert on the Great Depression. Pain isn’t fun. Corrections and adversity must be banned. They have now created the most all-encompassing debt fueled contrived boom in history, with debt, stocks, and real estate all outrageously overvalued. The party has been going on for over five years. The inevitable collapse will be earth shatteringly horrendous. The public will be shocked once again. The anger, disillusionment, and shattering of confidence in the powers that be will be monstrous. This time there will be blood.

“The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about”. Ludwig von Mises

Despite the non-stop propaganda campaign waged by the ruling class through their media mouthpieces about a non-existent economic recovery, the papering over of the gaping funding holes through the issuance of trillion more debt, the waging of wars against terrorists we created to distract the masses, conducting coups against our latest perceived enemies, and the blatant rigging of financial markets to extract the remaining wealth of the nation from the people, the crack-up boom is nearing its endgame. The system is exceptionally fragile. Confidence in leaders is waning. The people are growing weary of the lies and their restlessness will morph into anger when the economic collapse resumes. You can sense things are not right. Trust in the system has turned to suspicion and cynicism. The growing anger in the nation and the world is palpable. Violent protests are a daily event, even if the mainstream media doesn’t report them.

Yellen, Draghi, and Kuroda speak as if they know what they are doing, perform confidently when on stage, but continue to act in desperate manner five years into a supposed economic recovery. The emergency measures they continue to employ and expand upon reveal their angst and inability to implement a monetary solution. Their only tool is the printing press and when confidence in their infallibility dissipates, the system will fail. The stench of fraud, cronyism, corruption, and hypocrisy of the moneyed interests permeates our degraded culture of materialism, greed and criminality. The party was fun while it lasted, but it is reaching its sordid drunken climax in the near future. There is no means of avoiding the final collapse of this Federal Reserve created boom.

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“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” National Center for Educational Statistics, colleges and universities will award 1 million associate’s degrees and 1.8 million bachelor’s degrees in 2014-2015. So they are admitting more than 5 million in the front end, with only 2.8 million ever earning a degree. That means almost 50% never graduate, confirming the SAT predictive results. Then there is the fact an associate’s degree and most of the liberal arts degrees awarded qualify the graduate for a fry cook job at Burger King. What is even more fascinating in this episode of absurdity is the fact undergraduate enrollment has fallen by 930,000 in the last two years and stands only 700,000 higher than when Obama took office. A critical thinking person might ask how student loan debt could grow by $500 billion when college enrollment only grew by 700,000. That is $711,000 per additional student in college. Something doesn’t add up.

The Federal government couldn’t possibly have doled out $500 billion to anyone with a pulse as a way to manipulate the national unemployment rate lower, because anyone in school is not considered unemployed. Do you think the $500 billion was spent on tuition and books? Or do you think those “students” used it to for hookers, blow, booze, iGadgets, HDTVs, online poker, weed, fantasy football entry fees, and Linkedin stock? – Whatever it takes to boost GDP. With default rates already at all-time highs and accelerating skyward, with $131 billion of loans already in serious delinquency, you don’t need a PhD from the University of Phoenix (where default rates exceed 30%) like Shaq to realize the American taxpayer is going to get it good and hard once again.

It seems the for-profit diploma mills and community colleges account for a huge percentage of loan defaults. They are nothing but bottom feeders in a feeding frenzy of Federal loans. The five schools in the country with the highest level of defaulters from 2011 through 2014 are as follows:

  1. University of Phoenix – 45,123
  2. ITT Technical Institute – 11,260
  3. Kaplan University – 10,684
  4. DeVry University – 9,081
  5. Ivy Tech Community College – 7,237

These institutions of lower learning spend more annually on marketing than Ivy League business schools generate in total revenue. They are nothing more than swindlers, gaming the Federal loan system, and dispensing virtually worthless diplomas, and leaving its students deep in debt. The true consequence of providing easy money to people who shouldn’t be in college has been to drive up tuition rates at all colleges and universities. Without this $500 billion infusion of illusion, demand would drop, the diploma mills would go out of business, and legitimate institutions would have to lower tuition rates to attract students. But that’s not how Obama and his administration roll.

The biggest scam is the reported default rate disseminated by the Fed and regurgitated by the mainstream media. There are over 7 million borrowers in default on a federal or private student loan. Roughly a third of Federal Direct Loan Program borrowers have been forced into choosing alternative repayment plans to lower their payments. The reported 11.3% delinquency rate is based on total student loans outstanding. In reality 50% of the loan balances are held by students still in school, in their grace period, in deference, or in forbearance. They haven’t been required to make a payment yet. Of course the loans in deference or forbearance due to unemployment or economic hardship are essentially an allowable delinquency. The true delinquency rate on loans in the repayment cycle is 23%. This strongly implies that taxpayers will be on the hook for at least $250 billion of losses.

The long term impact on borrowers is also dire. Student loan debt cannot be extinguished in bankruptcy. It will follow them throughout their lives. Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order. The impact on their credit rating will keep them from buying a home. The pure volume of student loan debt is currently restricting household formation, first time home buyers, marriages, and consumer spending. The unintended negative consequences of issuing hundreds of billions in bad debt have far outweighed the ephemeral short term fake benefits. But short-term appearances are all that matter to the ruling class.

As of the fourth quarter of 2014, 11.3% of all borrowers were in default, with an additional 7% of borrowers having defaulted in the past. Another 6% of borrowers were in earlier stages of delinquency, but not yet defaulted; fully 37% of borrowers had at least one missed payment on their credit report. The chart below shows the cohort of student loans since 2005. Each cohort has progressively worse default experience. Roughly one quarter of each of the cohorts has defaulted as of the fourth quarter of 2014. The default rate of the 2009 cohort has surpassed that of the earlier cohorts much more quickly. Based on historical trends, the 2009 cohort will experience close to a 40% default rate. And this is before Obama unleashed the torrent of subprime student loan debt.

Only an Ivy League educated Princeton economist could examine the facts presented and conclude these were brilliant fiscal policy decisions which have boosted economic activity and fended off another Depression. A rational thinking person would conclude these desperate reckless measures will result in far worse outcomes when the debt dominoes begin to fall.

__spamspan_img_placeholder__Ludwig von Mises

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Key Economic Events Week of 3/18

3/19 BoJ meeting
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3/20 2:00 ET FOMC fedlines
3/20 2:30 ET Jerry's presser
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3/21 8:30 ET Philly Fed
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3/21 10:00 ET LEIII
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3/22 8:00 ET Some random Goon
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