CRUNCH TIME FOR AMERICAN CONSUMERS

An article by Peter Schiff of Euro Pacific Capital submitted to Financial Sense Online on December 28, 2007 highlighted the financial problems faced by US consumers.

"Beneath the surface lies not only a sea of tenuous loans to prime borrowers, but also an assortment of other liabilities backed by auto loans and credit card debit. For years standard practice allowed millions of car buyers to trade in old cars (that were worth less then outstanding loans), and roll the balances into new low interest rate loans for new cars. The same phenomena also occurred with credit cards.

For years, low short-term interest rates and low defaults encouraged banks to aggressively seek new customers. By turning higher interest rate, non-tax-deductible consumer debt into lower rate, tax deductible mortgage debt, consumers were able to temporarily manage their debts. Plus with their credit cards paid off, card holders were not only free to run their balances back up again, but their improved credit scores resulted in even more credit card offers.

Because defaults were low, bonds backed by auto loans and credit card debt were rated AAA, allowing Wall Street to easily package the debt for investors. Lenders, burned by subprime losses are cutting back. The home equity ATM has been shutdown and credit card and auto loan delinquencies are already at record highs. Auto lenders will no longer allow potential buyers to roll their negative auto equity into new loans.

As delinquencies continue to rise rating agencies will downgrade bonds backed by auto loans and credit card debt, inflicting subprime type losses on a much wider scale".

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