Corporations, consumers, the federal government. All have gone on unprecedented debt binges made possible by the Fed’s ZIRP madness.
It should come as no surprise that non-housing consumer debt is at an all-time high. Banks are heavily incentivized to lend out money they can borrow at near-zero interest rates, and consumers are able to carry large revolving balances when interest charges are low.
But rates are rising and most consumer debt is at variable rates. Small banks, who cater to subprime borrowers, are already seeing default rates higher than at the height of the Great Recession. The drumbeat continues: This can’t last, and it’s not difficult to see the tidal wave of bankruptcies, both corporate and household, on the horizon.
This toxic mix – rising interest rates and record high consumer debt in relationship to disposable income – has now started to bite the most vulnerable consumers once again. And for them, debt service is getting very difficult.
In Q1, the delinquency rate on credit card debt at banks other than the largest 100 – so at the 4,788 smaller banks – spiked to 5.9%, higher than at the peak during the Financial Crisis, and the credit-card charge-off rate spiked to 8%.
These smaller banks marketed to the most vulnerable consumers that had been rejected by the biggest banks. And now, once again, subprime is calling.