Weekly Wrap

1.4 million Americans filed for bankruptcy in 2009, one-third more than the year before, according to a report earlier this week in the Wall Street Journal. Recall that President George W. Bush tried to suppress bankruptcy filings by signing the Bankruptcy Reform Act of 2005. At first it was mission accomplished. Following a rush to the exits by filers hoping to beat the new law, bankruptcies dropped by three-fourths in 2006. As the chart above shows, they have been rising ever since.

Running for re-election in 2004, Bush championed the concept of the "ownership society," proclaiming that "America is a stronger country every single time a family moves into a home of their own." Of course, for most folks owning a home means taking out a mortgage. The Bush Administration, aide and abetted by Congress, facilitated widespread "ownership" by allowing exotic mortgages with no down payments, little or no payments for the first few years, and no documentation of a borrower's ability to repay. In truth, most of the owning going on during Bush's second term was banks (and upstream investors) coming to own uninformed borrowers.

With the Bankruptcy Reform Act, Bush and his acolytes in the banking industry wanted to make sure that borrowers would forever own up to their debt, not slough it off when times got tough. It should have been called the Debt Slave Act, says Mike Mish Shedlock, who considers it poetic justice that a bill designed to promote high-risk lending has backfired. Shedlock is not at all surprised by the uptick in bankruptcies, particularly Chapter 7 filings, which clear the deck by liquidating assets to pay off some debts and absolving filers of the rest. "If you're unemployed, struggling, and deep in debt, it may be best to get it over with." And do it now, before you're re-hired, while the means-testing for Chapter 7 works in your favor.

In cases where borrowers cannot simply walk away from their debt (as they do when, for example, defaulting on no-recourse home mortgages), they are smartly paying down high-interest loans. The American Banking Association reported yesterday that delinquencies declined in the third quarter for most types of consumer loans, including auto loans and bank cards. The exception: housing-related loans. Home-equity-loan delinquencies rose to a record 4.30% of all accounts, and mobile-home delinquencies were up as well, to 3.63%. This may be a sign that homeowners feel entitled to forbearance on housing-related debt. They also sense that banks are in no hurry to foreclose on residential properties in a saturated market.

Today the Federal Reserve reported that total seasonally adjusted consumer debt (all debt not secured by real estate) fell $17.5 billion in November to $2.46 trillion. Annualized, that is a drop of 8.5%, almost twice the cumulative rate of decline since consumer credit peaked at $2.58 trillion in Q3 2008.

Another thing that consumers are walking away from is their health insurance. Today brings the news that Anthem Blue Cross and Blue Shield, the largest health insurer in Maine, is seeking a rate increase of 23% for its 11,000-plus individual policy holders. If approved, the bump would cap a decade of truly mind-boggling increases in health premiums. Despite the increases, Anthem is losing money on individual policies as healthy subscribers migrate elsewhere (my wife and I dropped our HealthChoice years ago). Those left are experiencing the classic "death spiral."

I have my own plan for healthcare reform, and it doesn't take up 2,000 pages like all those congressional plans do. It takes up just one. The keystone is saying good-bye to private health insurers, not subsidizing them they way congressional Democrats propose to do. Incidentally, the reform proposals now in the pipeline are impeding economic recovery, as Kristin Graham ably explains.

So what's driving all those bankruptcies and delinquencies? Other than the high costs of healthcare, that is. Why, it's the weak labor market, of course. Four million jobs in the U.S. were lost in 2008, another four million in 2009. We needed to add 2.5 million jobs during those two years just to keep the unemployment rate from rising. This morning there was the widely anticipated report from the Bureau of Labor Statistics on the employment situation during the month of December. Prior to the news release, there had been hope that, for the first time since December 2007, the U.S. economy might have added jobs (the "whisper" number was +100K).

Alas, another 85,000 jobs were lost--or more, depending on what number you use. The Establishment Survey figure of -85K was the least damaging. The Household Survey yielded a whopping -589K. The number to which I pay the most attention--the adjusted household survey--came in at -465K. Folks, those numbers are just plain awful. As I write, stock traders seem to be reaching for their Tums. No surprise; they were warned.

Jake at EconomPic has graciously updated his chart showing hours worked per week per capita. Sobering.

Big deal. Who needs to work for a living these days? The government has you covered. Personal Current Transfer Receipts, as defined by the Bureau of Economic Analysis, are "benefits received by persons for which no current services are performed" (e.g. retirement and disability insurance benefits, worker's compensation, medical benefits, unemployment insurance and other income assistance, etc.). Transfer payments now add up to one-fifth of GDP. That's groovy. But, as former British Prime Minister Margaret Thatcher pointed out, "the trouble with socialism is that you eventually run out of other people's money."

Up, up, and away...