The New York Times published the third article in its Debt Trap series on the highly profitable debt industry today. Today it focuses on debt in developing countries. David Oser, Senior Economist with ShoreBank, discussed the global debt economy with me in January.
How credit smooths the economy
By Sally Duros
The pile of credit card offerings awaiting shredding in my hallway is at least 6 inches deep, and that’s only about three week’s worth. Although I dislike debt as much as the next person, a healthy credit line has saved my rear more than once.
I’ve got plenty of company.
“When was the last time you heard someone say, “I am saving up for something?” said David Oser, laughing, the chief economist for ShoreBank, Chicago.
“In our culture, if you have a job you have the right to unlimited amounts of credit. That has the unexpected benefit in that it smooths out the economy.”
It means we can keep buying even when times are tight and ”Ahhhh” what a blessing! Until the bills are due, that is.
We can, if we like, regard this credit card debt and our debt at large as part of a giant social science experiment that we are currently living through.
“Right now the way the world works economically, people in other countries make things, and we buy them,” Oser says. “We provide each other with services that cannot be provided directly.”
That’s the role of the United States. “By buying all that stuff, we improve the financial condition of people in other countries,” he says. “As long as that dynamic is beneficial to the world at large, there’s no point in worrying.”
“[With credit] you can keep the wheels of commerce spinning. But this housing crisis has the potential to put a spike in that wheel,” Oser says.
He notes that now we are hearing reports of rising auto loan delinquencies and credit card defaults. A while back I reported that research from Experian, the consumer credit agency, found that some 40 million U.S. borrowers were paying their mortgages after they paid their credit cards, which is a reversal of conventional wisdom.
â€œWhy was it easier to get behind on mortgages?â€ Oser asks. â€œThe answer to that is that the last thing in the world the mortgage servicers want to do is to foreclose.â€
It’s that much of a pain.
That’s one reason why Oser thinks the housing market’s recovery will take longer than we’d like. Another is the fact that the mortgage business is the biggest it’s ever been. “The gross domestic product is $13 trillion,” Oser says. “The total amount of mortgage debt outstanding is $11 trillion.”
And this $11 trillion in debt is spread out everywhere. When there’s a problem with a mortgage, the solution can be found only family by family, house by house. There is no top-down solution.
“Nothing ever moves in a straight line,” he says. “We will probably get to the bottom maybe in 2009.” Chicago has been fortunate in that our basic economy has remained strong in contrast to places like Detroit, and although the increase in home prices here has been considerable, it has not been outrageous.
“I am still in the camp of those who think a recession is unlikely” that is to say ” a national prolonged serious recession,” Oser says. “I think Chicago is as well positioned as about anywhere one can imagine. But remember, a falling tide sinks all boats.”
Oser believes nationwide we might have a quarter or two of negative growth. But he also believes localities where prices floated the highest during the housing bubble are likely already immersed in their own recessions.
“I would be surprised if Florida, California, Nevada and Michigan were not already in a recession,” he says.
Usually problems in housing are caused by a bigger problem in the economy, but this is a kind of reversal. “Housing is causing the problems. It’s a situation that Oser says we probably have never faced before.
“It’s harder to say whether Chicago does or does not get a pass,” he says. “We are affected by things that are happening in other parts of the country like price inflation.”
As to the dynamics of our culture as consumer to the world? The situation will change and will no longer be beneficial to us when most of the people in China and India are in the middle class, Oser says. But that day is far off in the future. “That is so far outside the realm of my crystal ball,” Oser says. “My guess though is that within our lifetimes the pace of technology will be so exponentially faster things will be really different. Really.”
Originally published by the Chicago Sun-Times Jan. 11, 2008