Is Another Bubble Brewing?

By May 2021, the US economy had found itself on the road to pandemic rebound. 

Consumers were gaining confidence and — as indicated by the rising trend in consumer credit — “savers” began reverting to their “spender” alter egos.

It was during this period of renewed love of debt that the Wall Street Journal published the following headline:

That’s right. Banks would be issuing credit cards to applicants who ordinarily couldn’t qualify. 

The article pointed out (all emphases mine)…

Some 53 million adults in the U.S. don’t have traditional credit scores, according to Fair Isaac Corp. , the creator of FICO credit scores. Many are often limited to payday loans and other costly forms of credit.

As a result…

Some of the largest U.S. banks plan to start sharing data on customers’ deposit accounts as part of a government-backed initiative to extend credit to people who have traditionally lacked opportunities to borrow.

JP Morgan Chase, Wells Fargo, US Bancorp among others are in on the plan.

The bank-account data will be reviewed after banks try to check applicants’ credit scores and find that they don’t have one, according to people familiar with the matter. Not having any returned checks, for example, could improve a person’s chances of being approved.

If they’re not bouncing checks now…  well let’s give them a line of credit. 

What could possibly go wrong?

They Could All Default? 

In all seriousness, credit is a fact of life in this world. One that’s never going away. And for the vast majority of people, some access to it is necessary. 

Personally I think if you don’t qualify for a loan, you shouldn’t be able to get a loan. (And I mean qualify under some reasonable standards — not the 2007 housing bubble standards.) But if banks want to take on that kind of risk, it’s up to management and their boards. 

Of course, when unqualified borrowers start defaulting left and right, and the consumer credit problem rises to crisis levels, you can be sure you and I will be the ones bailing out their bad bets (likely with interest!)   

Am I predicting a crisis? Probably not. But at the same time, missing payments is not a sign of a healthy economy. Francesca Ortegren, researcher at Clever Real Estate, noted that some 57% of consumers had missed a credit card payment in 2021.

JP Morgan execs warned just last month…

…that lower-income consumers, who make up a smaller slice of its customer base, are starting to feel the effects of red-hot inflation. Indeed, more consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards.

But more than that… 

Consumer Credit is a Stealth Time Bomb

As I’ve previously written to our paid readers, consumer spending comprises 70% of GDP. 

A lot of economic forecasters suggest that there is enough in consumer savings to keep the economy moving forward. Chase CEO Jamie Dimon (who will say anything that moves his agenda forward) “estimated that some $2 trillion in extra funds are still waiting to be spent.”

However, this chart of personal savings suggests those funds aren’t there.

US Personal Savings

Source: Tradingeconomics.com

And the kind of credit explosion we’re seeing suggests that most consumers are struggling to make ends meet.

There is a limit to how far folks can go into debt — a limit that will no doubt be stretched in the coming months — before they have to start cutting way back. 

And that will pave the way to the coming recession.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily