Thursday, April 12, 2007

Upside Down to Right Side Up

Eric Janszen --- A study of over extended Americans and how they got there by, James Scurlock.

James Scurlock's book and movie "Maxed Out" appears to be about over-indebted Americans. That is in fact what the Wharton Business School graduate set out to discover, he told us in an interview this week. What he found instead during six months traveling the nation was an out-of-control lending system, causing more than half of Americans to take on debts they cannot repay, leaving a wake of financial and personal destruction, driven by the rational actions of banks in desperate competition with each other for loans, running to its logical conclusion.

Right Side Up Signs
*Borrowers pursue lenders for loans
*Lenders prefer credit-worthy borrowers
*Borrowers who do not repay are "deadbeats"
*A mortgage is a debt
*A house is a place to live
*Revolving credit is used to finance major purchases, such as autos
*Banks don't need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"

Upside Down Signs
*Lenders pursue borrowers
*Lenders prefer borrowers with poor credit
*Borrowers who repay are "deadbeats"
*A mortgage is "wealth"
*A house is an "investment"
*Revolving credit is used to finance all purchases, such as food and clothing
*Banks need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"

If you start to see unemployment ticking up, the reversion back to Right Side Up has started. And I do mean "see," as in, with your own eyes. Don't pay much attention to the government numbers. As Paul Kasrial noted after the Bureau of Labored Statistics' employment numbers came out last week, the employment numbers are becoming increasingly self-contradictory and non-sensical.

James believes the transition back to Right Side Up will be rapid and catastrophic, taking only a couple of years. After studying this problem for over seven years, I stand by my prediction that the transition will be a slow and catastrophic process, taking a decade or more, much as the Japanese post-bubble period lasted, because the government will get involved to manage the transition. The difference is, whereas Japan's post-bubble period was deflationary, the US period will be inflationary.

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