The Problem With Cheap Credit

It’s Assumption Day. Today is a holiday here in France. You wouldn’t know it. No one is working, but that is just like every other day in August.

This country is completely f**cked up,’ says our handyman. ‘Nobody works. Everybody expects something for nothing.

Damien deserves description. His parents gave him to an orphanage. At 16, he began smoking and went to work; he’s been smoking and working — as a truck driver, day labourer, gardener, and handyman — ever since. He always has a cigarette in his mouth.

Even as we are about to move a piece of heavy furniture up the stairs, he stops:

Wait, I’ve got to light a cigarette.

He’s a goodhearted fellow. But he has his faults. He has a preternatural dislike for plants, especially flowers — a defect in a gardener. He mows them down; gasses them with Roundup; withholds water in dry periods and otherwise neglects them.

Often he allows so many weeds to grow around them they are starved of sun and water. Then he announces they ‘didn’t do very well this year’ and cuts them all down with the weed-whacker.

Damien has serious limitations as a handyman, too. The main one is he is not very handy.

We normally defend Damien against criticism. He is a stout worker and loyal companion. There is nothing he won’t try to do. And when the bell rings for drinks at 7 p.m., he often brings his own homemade pineau (a local aperitif made from fermented grape must)…or something stronger, such as his eau de vie, distilled illegally from local plums.

He fills and refills our glass — as well as his own — for as long as we are able to keep going.

But this week, an incident caused us some concern. Details to follow.

Innovations and absurdities
First, we must do our duty as your financial scout…

The Dow rose again yesterday — by 61 points. The correction our editor-in-chief, Chris Hunter, warned was underway seems to be petering out.

If Chris is wrong…and the selloff last week was just another market ‘head fake’…this will allow the credit bubble to grow even larger and more menacing.

When you create credit out of thin air…and then price it at below the rate of inflation…you have to expect that people will find ways to take advantage of it.

They will find new and exotic ways to borrow and lend. In the last major bubble, subprime mortgage debt was the most volatile gas.

This time, we are seeing innovations and absurdities in sovereign debt, corporate debt, the art market, technology stocks and many other areas. Here’s just one item that crossed our desk. From Bloomberg:

JP Morgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as €10 billion ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt.

Wall Street is starting to return to the financial innovation that helped extend the debt rally seven years ago before exacerbating the worst financial crisis since the Great Depression. The instruments are springing back to life as investors seek new ways to boost returns that are being suppressed by central bank stimulus. At the same time, they’re allowing hedge funds and other investors to bet more cheaply on a plunge after a 145% rally in junk bonds since 2008.

The general idea in 2007 was to turn mortgage loans into easily tradable assets by ‘securitizing’ them. This would make it easier to lend more money to more people who couldn’t pay it back.

But the innovators work on the demand side too. What, you can’t borrow because your credit score is too low? Hey, the credit industry has a solution. From the Wall Street Journal:

A change in how the most widely used credit score in the US is tallied will likely make it easier for tens of millions of Americans to get loans.

Fair Isaac Corp. said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.

The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report.

Did you notice that last remark?

Reworking credit scores are intended to boost ‘credit without creating more credit risk.’

Good luck with that!

Okay…we’ve put our head up over the parapet. All quiet on the Western Front (for now, at least). So, back to Damien…and why we’re ratting him out.

Bull in a china shop
The other day (wife) Elizabeth asked him to move some heirlooms out of the house, in anticipation of our big party. (We were introducing our new son in law, Ryan, to our friends in France.) Rain was in the forecast. So the house had to be cleaned out to accommodate guests.

Damien went at the job with his customary bull-in-a-china-shop finesse. He loaded Elizabeth’s delicate antiques onto a rickety wheelbarrow and bumped along to the garage. He pulled out a pair of feeble trestles…made a table…and piled the boxes and furniture on top.

We walked by and saw that the trestle tables were listing dangerously…and were about to fall over.

Damien, we have to fix this. They’re going to fall over.

Ah no…it’s all right.

I don’t think so…let’s put in another trestle, just in case.

OK…you lift it up and I’ll stick this other one underneath.

I tried to lift it. But it was too heavy.

This isn’t going to work. We need more manpower.

With that, Damien grabbed the side of the tabletop with one hand…holding the free trestle with the other. But the mass on top was too heavy. The effect of Damien’s intervention was to destabilise the whole thing. And it promptly crashed to the ground, breaking one of Elizabeth’s heirloom teapots.

Later, when Elizabeth discovered the wreckage, she remarked to Damien, ‘Oh no…you’ve broken the teapot I got from grandmother.

No, it wasn’t me. It was Monsieur Bonner. I told him to leave it alone.


Bill Bonner
For Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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