We Blew a $4.2 Trillion Debt Bubble – Then 10 Million of Us Lost Our Jobs

Total outstanding U.S. consumer credit stood at nearly $4.2 trillion in February. According to the latest consumer credit report from the Federal Reserve, seasonally adjusted consumer borrowing increased by 6.4% in February. As the economy flails through the worst financial crisis in living memory, consumer credit has become a massive liability to consumers and lenders alike.

Just before the 2008 financial crisis, total outstanding consumer credit was a comparatively “paltry” $2.6 trillion. Financial legend Warren Buffett once wrote in a 2001 letter to Berkshire Hathaway shareholders: After all, you only find out who is swimming naked when the tide goes out.

Well, the tide just went out, and the consumer credit data show many were swimming naked. Americans were borrowing at record levels just before the COVID-19 pandemic rocked the world. At the time, employment and earnings were also soaring at record highs.

Sentier Research, a firm headed by former Census Bureau officials, estimates median household income for Dec. 2019 stood at a record-high $65,666. Consumers could have used that opportunity to shore up their finances and pay down consumer debt. But Americans leveraged their higher earning power to borrow more. With the economy suddenly ground to a halt, and millions of Americans losing their jobs, lenders may find that they are holding a massive pile of toxic consumer credit loans.

Around 10 million Americans filed for unemployment benefits in just two weeks at the end of March. Consumer credit delinquency and charge off rates already hit a seven-year high in last year’s third quarter. That was when the good times were still rolling.

Quarter one and two consumer credit charge offs are liable to spike drastically in this economic winter. Especially since the last decade saw a staggering flow of subprime and deep subprime credit card originations. Billions of dollars of this outstanding consumer credit is bundled into securities. Banks trade them back and forth in an ominous echo of the pre-2008 financial crisis economy.

We Blew a $4.2 Trillion Debt Bubble – Then 10 Million of Us Lost Our Jobs, CCN, Apr 8