[1] http://blogs.wsj.com/economics/2015/04/07/americans-pull-bac...
"Because many creditworthy consumers are still cautious about spending, lenders are turning more aggressively to subprime borrowers. Lenders issued some 10.6 million general-purpose credit cards to subprime borrowers last year, up 25% from 2014 and the highest level since 2007, according to Equifax."
"Overall, lenders gave out more than 104 million general-purpose and store credit cards in 2015, up 6.5% from a year earlier and up 47% from the bottom in 2010, according to Equifax."
We could hypothesize that credit card debt won't be as massive as mortgage debt and thus may not cause catastrophic events. However, on the flip side there is little to no collateral in credit card debt that a creditor would get in return of defaulting on your credit loan.
The more I look at credit debt, student loan debt, and fairly recently CDO's (Collateralized Debt Obligation) that banks are doing again we are setting ourselves up for failure again.
Anyone have any thoughts on all this?
The subprime mortgages propelled into the prime markets only after a major insurer with a strong balance sheet announced that they will make their investors whole in an [unlikely] event of a default, which led to ratings' agencies decision to assign the AAA rating.
Without AAA, such securities are relegated to their own little corner of the market, which sooner or later faces capital constraints.
If you give a subprime borrower a mortgage and the market continues to go up, they can pay it back with the gains from selling the house. On paper, it looks like everybody won.
With credit cards however, the owner eventually does have to pay the debt back. If you're too loose with handing out credit cards, it's easy to end up with a bunch of people defaulting.
Plus, the scales are an order of magnitude different. Moreover, credit card debt isn't tied to the rest of the economy as heavily as mortgages are.