Who's to blame for defaulting?

By DAVID MOON, Moon Capital Management, LLC
December 9, 2012

Last year American Express reported that 2.2 percent of its cards were delinquent. The 2011 year-end delinquency rate for the entire credit card industry was 3.54 percent.

This compares to 12 percent of all home mortgages that are delinquent. In 2011 there were 2.8 million home foreclosures.

There were 2 million cars repossessed.

Bankers tell us this phenomenon is relatively new. At one time a family would do anything possible to avoid a late mortgage payment, much less an outright foreclosure. Why are people today more likely to default on their home loans before they will a car loan or credit card?

Some, if not all, of it is probably practical. The credit card company will cut off my card if I miss a payment. If I’m using the card to buy groceries, I can’t afford to lose my card.

I need my car to get to work. It takes a lot longer to kick me out of my house than my car.

At the obvious core of that explanation, however, is an aggressive manner of budgeting (or not budgeting) that places the individual in the position of having to play musical bills.

The people spend too much. Or they make too little. Either way, if your long-term plan is to use a credit card to buy groceries, you will eventually run out of either credit or food.

I thought about that Tuesday when the Autodata announced that US auto sales jumped 15 percent from a year ago. Attractive financing was one explanation.

These new car sales figures are not a reflection of a strengthening economy.

Protesters around the US complain that evil and manipulative bankers are (partially?) to blame for the US mortgage crisis. But do we blame GMAC when a family defaults on its home loan because their car payments are too large? Is it Dillard’s fault that we spent too much money at the mall?

The citizens of Greece are furious with their government for their current financial crisis. The blame is partially accurate. The people hurling the rocks share blame with their government officials.

But no one in Greece is silly enough to blame the worldwide financial community for lending it too much money. In fact, Greek officials must rely on additional borrowing from that financial community simply to pay its current bills.

Does that sound familiar? It is a pattern replicated by the US government and now embraced by a large percentage of individuals.

A major difference is that Greece and individuals must convince a willing lender to continue to fund their consumption. The US government borrows money from the Federal Reserve, an entity with the luxury of simply creating the money it uses to lend the government to fund non-entitlement and debt service spending.

We will fall back into a recession whether or not Washington reaches a tax and spending agreement prior to January 1. The only questions are about timing and severity. And the longer we compound the same patterns that set the stage for the last recession, the worse the next one will be.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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