September 22, 2009
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News: Moody Still Predicts Charge-offs Worsening
Even after its recent good news report, the Moody research group still see worse times ahead for credit card charge-offs. The report revealed a trend where credit card defaults were diminishing for the first time in over a year. Four months in a row for first-level defaults (over 30 days late but not yet 60 days late) the percentage rate stopped climbing and started falling This may appear to be optimistic to some but the Moody group has still not backed off from their earlier prediction that the rate will continue to escalate until mid-next year. Based on 6-month old unemployment projections which predict unemployment rates to peak around 10.5% by mid-next year, credit card default rates project as high as 12 to 13%. The question is, was the recent charge-off rate (uncollectible debt) drop from its record 10.76% in June down to 10.52% in July just a "burp"? What about the 4-month-in-a-row drop in level-1 delinquencies?
For statistical projections to hold integrity, they must guarantee "ceteras parabus". Basically, that means "other conditions staying the same throughout the projection". So far, no one has dared to update the 6-month old unemployment projection. Will Mr. Obama succeed in 'denting' the dismal unemployment outlook? The recession recovery has already been shown to progress way ahead of projections. Is it possible that credit card borrowers are getting smarter. There seems to be compelling evidence fostering optimism. Credit card borrowers do seem to acting more responsibly.
From the most basic level, a strong economy results from a reciprocating trust relationship between consumers and those that provide good-paying jobs. If we could only get that right, the recession would end over night. Will we learn? If not, then almost certainly Moody will be right. When will the large credit card issuers finally understand that it's better to provide good jobs in this country then to award obscene financial incentives to executives. They're not only hurting out country but, they're also hurting themselves as well (except for the executives, of course).