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Household Debt Rises to New Record of $13 Trillion

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 21, 2017

1. Household Debt Hits New Record of $13 Trillion

2. Auto Loans: Delinquencies Rising in “Sub-Prime” Market

3. The Secret Congressional Sexual Harassment Slush Fund

4. Congress’s Office of Compliance – Guilty Until Proven Innocent

Overview

A new report from the Federal Reserve Bank of New York last week found that US household debt hit another record high in the 3Q of almost $13 trillion. The largest increases came in student loans, auto debt and credit cards. I’ll share the details with you just below.

Following that discussion, we’ll shift gears entirely and look at the rapid increase in sexual harassment charges of late.  Specifically, I’ll share a closely-guarded secret that Congress would rather we not know about. Did you know that there is a taxpayer-funded slush fund in Washington that politicians can tap to buy-off their accusers? Neither did I until recently.

You will be shocked to learn how many accusers have filed complaints and been paid-off with money from the slush fund since the late 1990s. Over $15 million in claims have been paid, without us knowing who they were paid on behalf of. This is preposterous! 

Yet this story gets even worse, unfortunately. As you’ll read later on, those who accuse members of Congress or their senior staffers of sexual harassment are often presumed to be guilty of lying until their claims can be verified. But I’m getting ahead of myself.

Household Debt Hits New Record of $13 Trillion

As the stock market soars to new heights, new data shows that US household debt has reached yet another new record high. The Federal Reserve Bank of New York reported last week that household debt totaled almost $13 trillion ($12.96T) in the 3Q ended September 30, an increase of 0.9% from the previous quarter.

The 3Q reading was $280 billion above the previous record peak back in the 3Q of 2008. Just since 2013, household debt has climbed more than 16%.

Household Debt

Here are the highlights from last week’s report from the New York Fed:

  • Overall: The $13 trillion of household debt is $280 billion above its 2008 third quarter peak, and 16.2% above the 2013 second quarter trough.
  • Mortgage balances: remain the highest component of household debt, comprising $8.7 trillion
  • Mortgage delinquencies continued to improve, with 1.4% of mortgages 90+ days delinquent
  • Student loan debt: $1.4 trillion, with 11.2% 90+ days delinquent
  • Credit card balances: increased by $24 billion, with 4.6% 90+ days delinquent
  • Auto loans balances: increased by $24 billion to $1.2 trillion, continuing a six year trend, while 90+ day delinquencies increased to 4%

Mortgage balances, the largest component of household debt, increased again during the 3Q. Mortgage balances shown on consumer credit reports on September 30 stood at $8.74 trillion, an increase of $52 billion from the second quarter of 2017.

Credit card debt increased by $24 billion to a total of $808 billion in the 3Q, while student loan debt increased by $13 billion and stood at $1.36 trillion as of the end of September.

The Fed also reported that, as of September, 4.9% of outstanding household debt was in some stage of delinquency. More specifically, of the $630 billion of debt that is delinquent, $408 billion is seriously delinquent (90 days late or longer), the Fed said.

Consumers’ transition into serious delinquency for credit cards has been increasing at a notable rate for one year, according to the Fed. The serious delinquency rate increased from 4.4% in the 2Q to 4.6% in the 3Q.

Auto Loans: Delinquencies Rising in “Sub-Prime” Market

The growth in household debt can be attributed, at least in part, to the growth in auto loan balances, which have increased for 26 consecutive quarters as a result of new loan originations. In the aggregate, there are apprx. $435 billion worth of auto loans outstanding that were made to consumers with a credit score below 660.

Another area for concern, according to the New York Fed, is rising auto loan delinquencies to “sub-prime” borrowers – primarily those with lower credit scores. The New York Fed estimated that 23 million consumers hold subprime auto loans, which are based on a credit score below 620.

Apprx. 20% of new car loan originations are made to sub-prime borrowers. These loans were not made by traditional banks or credit unions, but by auto finance companies such as car dealers and related lenders.

As you might expect, there is a divergence in the delinquency rate for auto loans between bank and credit union lenders compared with non-bank lenders. Auto loans from traditional bank lenders had a 4.4% delinquency rate (90 days or longer), which has been improving since the financial crisis. However, delinquencies on auto loans from non-bank lenders have been more than double those of traditional bank lenders – at 9.7% over the year ended September.

Given its current relative size as a consumer loan segment, the NY Fed says delinquent sub-prime auto loans from auto finance companies do not, on an absolute basis, meaningfully impact the overall economy – assuming it does not continue to worsen. Given that caveat, the subprime auto loan market is important to monitor, at least in the near-term as one economic barometer.

In summary, Americans faced with lackluster income growth continue to finance more of their spending with debt. The largest gains came in student loans, auto debt and credit cards. The question is, how long can this trend continue?

There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. That will only worsen as the Fed raises interest rates most likely in December, with additional increases likely next year.

The Secret Congressional Sexual Harassment Slush Fund

New sexual harassment charges against prominent men, including some members of Congress and other Washington high-brows, have been increasingly hurled in recent weeks. More women are coming forth almost daily with new charges of harassment, many of which are alleged to have occurred decades ago. All of these charges, if true, are very serious.

But what I want to talk about today is the revelation last week of the existence of a large, relatively unknown taxpayer-funded government “slush fund” that allows politicians to buy-off their accusers and settle out of court. This could be the biggest Washington scandal in decades. Let’s see if we can get to the bottom of it.

Let’s start with a question: Since when are members of Congress and their staffs who are accused of sexual harassment allowed to hush-up and pay off their accusers from a secret slush fund financed by taxpayer dollars? Answer: Since 1995, we now find out.

Congress, as we all know, chooses to exempt itself from many of the same laws it foists on the rest of us. This is nothing new, unfortunately, and many Americans agree: “If only Congress had to live under the same laws we do, they’d get it, and they’d change it.” But they don’t, and they won’t – and we the voting public don’t do much about it.

Sen. Al FrankenYet that may be changing just ahead as more Americans learn about this large slush fund of taxpayer dollars used to pay off sexual harassment accusers victimized by members of Congress and their senior staffers.

The slush fund was created following the 1995 enactment of the Congressional Accountability Act which was supposedly designed to make Congress accountable to many of the same laws it applies to us.

In addition, the Act sought to make changes in how Congress deals with charges of sexual harassment against its members and staff. Prior to enactment of the law, a victim of sexual harassment by a member of Congress had virtually no legal recourse at all.

Warning: here’s where I get to the part that is going to make you very mad.

Congress’s Office of Compliance – Guilty Until Proven Innocent

The Congressional Accountability Act (CAA) created the “Office of Compliance” to deal with sexual harassment accusations and other sensitive issues. The problem is, Congress decided essentially that accusers are guilty of lying until proven innocent. Yes, really!

Complainants are required to begin the dispute resolution process with a mandatory course of counseling that can last up to 30 days. Why counseling for the accuser and not the accused?

Only after completing the compulsory counseling may a complainant pursue mediation. That, too, can last up to 30 days. If mediation fails to resolve the issue to the complainant’s satisfaction, he or she can only request an “administrative hearing,” or file a federal lawsuit – both of which are expensive and lengthy.

Here’s the kicker: If the dispute is resolved in favor of the complainant (read: victim), funds for the settlement don’t come out of the offender’s personal bank account, or his or her campaign account. Instead, they come out of this secret taxpayer-funded account maintained by the Office of Compliance. It is so secret, in fact, that taxpayers don’t even know they are funding it.

According to the Washington Post, there were 235 complainants (mostly sexual harassment accusations) that received compensation totaling $15.2 million between 1997 and 2014. That’s more than one settlement per month for 17 years and nearly $1 million in payoffs per year. We, the taxpayers, have no idea on whose behalf we’ve been paying to settle these mostly sexual harassment claims. That’s flat-out wrong!

I will say that the reasoning behind this convoluted dispute resolution process was that there could be scurrilous political operatives trying to target political opponents with potentially career-ending sexual harassment claims that are false. That is a reasonable concern. But in the process of establishing protections for its members, Congress knowingly or unknowingly institutionalized a “cover-up culture, in which the supreme end goal is to settle out of court and pay the alleged victims to go away quietly.

The “resolution” system is unfairly rigged to protect the careers of politicians and their senior staffers. The fact that the accuser counseling sessions are mandatory reveals that the objective has little to do with helping the alleged victims, but is instead simply aimed at dissuading the alleged victims from proceeding with a legal complaint. Leave it to Congress to find a way to insert layers of bureaucracy, paperwork and legal cost into this resolution process.

In light of the recent explosion of sexual harassment charges, proposals are now floating in Washington that would require mandatory sexual harassment training for members of Congress and their staffs. Maybe that’s a good idea, but more importantly the sexual harassment dispute resolution mechanism must be changed so that accusers are not guilty until proven innocent.

We, the taxpayers who have been paying for almost two decades to quietly settle literally hundreds of sexual harassment claims against members of Congress and their staffs, have a right to know which members and staffers have made use of the hush money over the years. Going forward, taxpayers should have detailed knowledge about how that fund is used.

If Congress wants to get serious about its apparent culture of abuse, it will need to address its cover-up culture. Slush funds may serve the immediate purpose of getting alleged victims to go away, but they do little to stem the tide of sexual harassment. What Congress needs – and American taxpayers deserve – is more transparency, whether they like it or not.

Finally, if I only learned about this bottomless slush fund in recent days, there’s a good chance your family, friends and business associates don’t know about it either. Thus, you have my permission and encouragement to forward this information at will.

Hat tip to Jenny Beth Martin at THE HILL for first bringing this to my attention.

Lastly, I will not be posting a Blog on Thursday as I will be cooking up a storm.

Wishing you a Happy Thanksgiving,

Gary D. Halbert

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Read Gary’s blog and join the conversation at garydhalbert.com.

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