Former Chair of the US Federal Reserve Alan Greenspan has noted that the idea that the financial system be left to largely run itself based on enlightened self-interest is a flawed approach. But the alternative isn't obvious.
There is NoW a de facto third tier of credit represented by IOUs deposited to accounts by non-bank lenders, and neither guaranteed by FDIC nor CDIC and often not necessarily backed by bank reserves. This tier represents shadow bank lending.
As an example over 8.4% of subprime auto loans taken out in the first quarter of 2014 were already delinquent by November, according to an analysis of Equifax data by Moody’s Analytics for the Wall Street Journal. That’s the highest rate of early subprime delinquencies since Financial-Crisis year 2008.
Stuffing people into cars they can’t afford and ultimately may not be able to pay for is big business. Auto loans to subprime borrowers (credit scores below 640) make up over 31% of all auto loans, according to Equifax. Outstanding loan balances have soared nearly 17% over the last two years. At this rate, they’ll breach the $1-trillion mark by the end of the first quarter this year.
In broader terms, 2.6% of the auto loans taken out in Q1 2014 were delinquent by November 2014, the highest rate of early delinquencies since crisis-year 2008, when they rose above 3%.
Along with these prone to default car loans a whole range of credit / debt obligations are then bubble wrapped and re sold as collateralized debt obligations, CDO, to those in the shadows.
Not to be outdone as world class imitators, Chinese authorities have approved 27 second-tier mainland banks to sell CDOs, through a registration system that will no longer require them to apply to regulators for review and approval before issuance, Reuters reported, citing unnamed sources. The banks, which include Ping An Bank (000001.SHE) and Shanghai Pudong Development Bank (600000.SHA), now need only to register to float such securities, which are created by packaging together a pool of underlying assets--such as car loans or credit-card balances--which are difficult to sell individually.The State Council has pushed banks to use asset-backed securities to invigorate existing assets and help the government curb rapid growth in the money supply in recent years.
However, on the global ' non recovery road ahead ' slow growth ahead signs persist.
Not in Asia, not in Europe and arguably neither in US has stimulus, credit expansion and monetary easing policy produced either business investments / or increased middle class incomes. The global unemployment gap that opened during '07 - '08 crisis has never closed. Do the math - sluggish employment + sluggish incomes = no momentum. The never ending arches of slow growth remain constant. These are the new good old days.