The Fed could trigger a personal debt crisis
Each time the Federal Reserve raises interest rates, which is normally the sign of a booming economy, it could hurt millions of vulnerable debt-heavy households.
Some market and credit card industry observers warn that many people may suddenly not be able to pay their monthly bills.
What happens, the analysts ask, if millions of people — as happened in the financial crisis of 2008 — suddenly can’t pay their subprime auto loans or credit card bills because higher rates cause monthly payments to also rise?
“This could be detrimental on several different levels — unfortunately, because we have just had this tremendous surge in sub-prime auto loans — unlike anything we have seen in prior cycles,” says Danielle DiMartino Booth, a former Dallas Federal Reserve adviser and now an economic consultant.
“My greatest fear is that some of the people who lost their homes in the housing bubble are going to be the same people who the repo man will visit,” she said.
With credit card debt once again reaching historic highs, a few observers warn 2018 could be a difficult year for millions of American households.
Booth notes disturbing echoes of 2008: declining savings rates, problem auto loans and all that card debt. Average household credit card debt has gone up every year since 2013, increasing from $6,224 to $7,135, according to NerdWallet.com.
Booth says auto-loan delinquency rates have already exceeded 2008 crisis levels, and interest rates are rising at the same time card debt is.
Credit card balances, according to the latest Federal Reserve report, peaked at just over $1 trillion in 2007 and 2008. During the recession, these balances fell to under $800 billion. They have since rebounded steadily, the central bank says.
Indeed, in November, card debt went up $11.2 billion, reaching a total of $1.023 trillion. That beat the prerecession record of $1.021 trillion, according to the Fed.
So far, notes Bill Hardekopf of LowCards.com., cardholders seem to feel that they can handle a bigger debt burden because the economy is stronger than it was a decade ago. Card default rates are now low, he adds.
“But interest rates are expected to continue to rise this year. And that will put more pressure on those who carry a month-to- month balance and pay those higher interest rates each month,” Hardekopf cautions.
Hardekopf says the most vulnerable are those who never pay off balances but carry big interest-charging balances from month to month.
An official of a credit rating agency recently wrote about this potential problem:
“Auto loans and credit cards bear watching,” according to Rita Sahu, a vice president with Moody’s, in a 2018 banking-outlook report.
“Auto-loan delinquencies are above precrisis levels at around 2.3 percent,” she wrote.
Sahu warns that automobile loans and credit card numbers are “negative outliers.”
And that, adds Booth, pointing to the Sahu report, could have implications for the economy.
“As we are a nation driven by consumption, that could certainly hurt overall economic growth,” says Booth, author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America.” She believes the economy will be “on a sugar high” for the next two quarters from tax cuts but will then slump.