Yves Smith has an interesting post out asking whether student loans are going the way of subprime, potentially triggering another financial crisis if the US goes into recession. I think it’s a good question to ask in light of my last weekly post on risk re-pricing. I want to go into a bit o that now but I have to lead this off with some news about where Credit Writedowns is headed. This is important for Bronze members especially.
What I have decided is that it is too cumbersome to deal with free posts, contributor posts, guest posts, and three different membership tiers at Credit Writedowns Pro all at the same time. The complexity of the site has become unwieldy from a managerial point of view and I don’t have the time to help manage it. What’s more is I really haven’t been able to write the daily piece with the regularity it deserves in the last month. So I have decided to concentrate most of my energy on the gold premium membership.
What that means going forward is that there will be almost no free content at Credit Writedowns either from me or from other CW contributors. ANd there will be almost no guest posts. I hate doing this because I really have enjoyed carrying other people’s content here at our site. And while we have dialled it back a bit in the last few months, just from a logistical perspective, I am going to have to dial it back almost completely. Niels Jensen’s monthly posts will go up. I imagine I will have content from Rick Bookstaber, Marshall Auerback, and Michael Pettis from time to time too. But this will be the exception rather than the rule.
On the paid side, we have already stopped offering the Bronze and Silver tiers to new subscribers. And now I have decided to halt the tiering system altogether. I’m not sure how we should play this but here’s what I want to do: for the next bit (could be a week or a month – I can’t decide since this is going to be a light posting holiday season period), I will post all of the premium content at the Bronze level. That way every Bronze and Silver member can get a feel for what I offer content-wise. Then we are going to switch off the Bronze and Silver memberships and ask you if you would like to convert to the gold membership. I am not sure about process now, but I anticipate this will happen over the next month. That’s it on this score for now. Please email us at feedback@creditwritedowns.com with feedback.
As for the student loan situation, Yves says they are “undeniably in bubble territory”. I haven’t followed this market, so I can’t say if this is true. But I always respect her analysis. So this intrigues me. She writes:
A recent New York Fed study found that 94% of recent graduates had borrowed to help pay for their education, and average debt levels among student borrowers is $23,000. Remember, that average includes seasoned borrowers, who presumably borrowed less and also in many cases reduced the principal amount of their loans, so the average amount borrowed by recent grads is certain to be higher. Student debt is senior to all other consumer debt; unlike, say, credit card balances, Social Security payments can be garnished to pay delinquencies. As a result, it has contributed to the fall in the homeownership rate, since many young people who want to buy a house can’t because their level of student debt prevents them from getting a mortgage.
None of that is de facto problematic unless you run into repayment and delinquency problems. ANd this is where we find ourselves. Not only is student loan debt, along with auto debt, driving US consumer credit patterns now, we also see rising delinquency rates. Yves cites a figure of 11% of loans being at least 90 days past due at the end of Q3 2012, which is up sharply from 8.9% at the end of Q2 2012. You can see the delinquency rates in the chart from the Wall Street Journal below.
The interesting bit here is that the delinquency pattern for student loans is not the same as it is for other consumer debt. With auto loans, HELOCs and credit cards, the delinquency profiles bumped up during the crisis and have subsequently reversed. With student debt, the sharp rise in delinquency is now. It isn’t clear to me why student debt delinquency patterns have been so different from the rest. But what does worry me here is that the sharp rise in delinquency coincides with a decline in other consumer debt delinquencies and with foreclosures as well as a large rise in student debt overall and against a backdrop in which the fiscal cliff could trigger recession.
In my view, the worst case scenario here is that the fiscal cliff triggers some sort of student debt asset-backed bond crisis that causes a risk repricing in 2013. At this point, I can’t say how likely such a scenario is since I am still starting to look at this market and because I am not wholly up-to-date on my 2013 predictions yet. But, I think I should flag this as something we need to be watching. As I get more information, I will write more analysis.
Thanks and do give feedback on the changes coming.
Edward
“despite some pious noises about the burden that student loans place on young Americans, there’s been no willingness in the officialdom to do much about it. But that may finally be changing. The latest Federal Reserve data is grim.”
“Low interest rates made necessary by global deleveraging have squeezed risk premiums out of nearly every asset class, Dalio said. As a result, most financial assets are “fully priced” and many are overvalued, according to Dalio.
“I think those risk premiums are likely to expand, and as a result I think that is generally a negative for asset classes as a whole,” Dalio said.”
Central Banks
“The Fed is forecasting unemployment between 7.8 per cent and 7.9 per cent in the current quarter, dropping to between 7.4 per cent and 7.7 per cent in the last quarter of 2013. The Fed is also expecting core inflation to remain between 1.6 per cent and 1.9 per cent next year, well below the 2.5 per cent threshold it announced for low interest rates on Wednesday.”
Europe
“Finance Minister Michael Noonan told a hushed parliamentary chamber that Ireland must keep slashing its deficits down to the eurozone limit of 3 percent of GDP and it “still has a long way to go.” He said Ireland expects to report deficits of 8.2 percent this year and 7.5 percent next year, but only if the country can deliver stronger economic growth in the face of deepening cuts.”
““They have a vibrant export sector, and a primary surplus. If there is any country in EMU that would benefit from leaving the euro and restoring competitiveness, it is obviously Italy,” said Andrew Roberts from RBS.
“The numbers are staring them in the face. We think the story of 2013 is not about countries being forced to leave EMU but whether they choose to leave.””
“While the risk of a Grexit, which many thought was so imminent, has receded, euro skeptics have turned their attention to Spain and/or Italy.
The Wall Street Journal reports of a euro skeptic hedge fund note warning of a 40% chance that Spain leaves EMU 2014-2015. Some economists have also identified rising unemployment as the breaking issue.
Italy, though, is poised to leapfrog ahead of Spain. A couple of large banks argues that Italy, more than others, has much to gain on leaving EMU.”
Technology and jobs
Technology
““This is a huge platform change; this is of the scale of 20 years ago — Microsoft versus Apple,” he said. “We’re winning that war pretty clearly now.””
“Samsung is South Korea’s greatest economic success, and, more recently, the subject of major controversy. Economists, owners of small- and medium-size businesses, and some politicians say Samsung no longer merely powers the country but overpowers it, wielding influence that nearly matches that of the government.
Debate over how to curb the size and power of Samsung and other family-run conglomerates has become the key issue in South Korea’s Dec. 19 presidential election, with polls showing that about three in four voters say they feel negatively about the country’s few behemoth businesses. Candidates are sparring over how far to go to constrain them.”
“Microsoft’s Windows RT-powered Surface tablet has been on sale for a little over a month now, available for purchase exclusively from the Microsoft Store (online and brick-and-mortar). And if early Web traffic from the device is any indication, it hasn’t exactly been flying off the shelves.”
Elsewhere
“the Roman hyperinflation period — constantly referred to by debasement obsessives — post-dates actual debasement by about 60 years. Using it as a justification for the hyperinflation is like suggesting that a hypothetical debasement in the 1950s could in some way be responsible for today’s economic woes.
Secondly, the Roman debasement was not a one off affair. History tells us that the Romans were “debasing” their currency successfully for many decades with no hyperinflationary consequences. What changed ahead of the hyperinflation period of the third century, however, was that the Empire’s political stability was being threatened.”