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What do delinquent loan payments reveal about the economy?


Wall Street has entered what traders call bear market territory. Markets in Japan, Australia, South Korea and China fell today after U.S. stocks hit the milestone indicating a 20% decline or more from recent highs. Other financial trouble could be brewing even closer to home. The credit reporting agencies Equifax and TransUnion say young people and lower income households are struggling to pay off car loans and other debt. Aaron Klein is a senior fellow in economic studies with the Brookings Institution. Aaron, are we seeing clear signs of an economy in trouble?

AARON KLEIN: No, I don't think we are in the sense that the traditional markers of GDP and unemployment are, generally, pretty good. But what you have seen is a huge decrease in some of the asset values, stock prices, changes in bonds, the rout in crypto. And these asset prices fluctuate wildly. It's important to remember - they're down 20% from their highs. But their highs are way larger than they were when COVID struck. And I don't think anybody thinks the society is better off for the last couple of years of COVID. However, lower income individuals are experiencing a little more hardship. One, the government benefits - the various stimulus checks, the enhanced unemployment insurance benefits, the loan forgiveness and support during the pandemic - are being pulled out from them. And as a result, they're starting to get back to what's historically more normal levels of financial difficulty at home. And that is reverberating.

MARTÍNEZ: So is it a return to normal or a warning sign because it just - it seems like it can't be both.

KLEIN: Well, it's a bit of a combination in the sense that, one, it's a return to normal. But what's different now is this level of inflation. We've reached a very high level of inflation, you know? When I teach economics, it was starting to get very hard to even explain high levels of inflation to the students because they hadn't experienced anything, they hadn't heard their parents talk about anything like this for a very long time. And the Federal Reserve got inflation wrong. And now they're trying to correct their mistake by pretty quickly hiking interest rates. And that will slow the economy. And it could slow it more significantly. But monetary policy takes time to act. There's a long lag between when the Fed moves this week, when it moved before and when that trickles through the economy. Markets react instantly to that. But usually, it can take up to a year before the full effect of a Federal Reserve interest rate hike is felt on the real economy.

MARTÍNEZ: Aaron, those pandemic relief checks, did that encourage people, especially young people, to maybe overspend and maybe take on too much debt?

KLEIN: Well, it's hard to know in terms of how much they're spending. Keep in mind, during the pandemic, it was hard to buy many things. I remember trying to run around frantically looking for toilet paper, right? So it's not as if people were going out, partying it up on these relief checks. To the contrary, they were being used for daily necessity in life. But what I do think that you have is a situation where you had an economy going into the pandemic that had some problems even after 10 years of strong growth, in large part because it's been so unequal. Lower income people had not gotten the full benefits of the booming economy that we had over the 2010s. And so there are questions of equality that get mixed into this. Look; I thought - I was among the first people - when the pandemic hit, I thought we were going to have a huge problem in used cars because there was - the lending that had gone on in used cars and subprime auto was, really, out of control. Turns out, for the first time in recorded history, used cars appreciated in value. And that masked a lot of the underlying problems in that market. Now you're seeing used car default rates rise again, in large part, I think, because the lenders want to get their hands back on these cars that are now suddenly worth more than they were two years ago.

MARTÍNEZ: So on those defaults, though, what's the long-term impact for people whose credit scores will probably - certainly be affected by missing payments or defaulting?

KLEIN: Well, look; there are fewer Americans who are considered subprime credits today than there were going into the pandemic. This is largely because people used those relief checks responsibly. They helped reduce their amount of debt. And they built up a little bit of a savings cushion. But there's always a group of folks who have trouble making their monthly bills, in large part because society has become so unequal and income is so volatile among folks who are living paycheck to paycheck, trying to make it by - hourly workers, etc. And I think we're going to get back to a situation where those stresses in those households continue. In the long run, I hope we get off this whole concept of credit scoring, whether or not you pay the bill five or six years ago determining some magic number that's made to look like your SATs and your creditworthiness. There's a lot of better technology to assess creditworthiness out there today.

MARTÍNEZ: Aaron, really quick before you go - so this unequal, this inequality, I mean, considering that, you know, these credit scores still determine how much we can spend and how much we can buy in a lot of cases, is this inequality just going to keep on lasting long term?

KLEIN: Well, until there's a structural change, yes. And we need a different way to order credit, to give people opportunity than these silly, three-digit FICO scores that look like SATs and are about as predictive in life.

MARTÍNEZ: Aaron Klein is a senior fellow in economic studies at the Brookings Institution. Aaron, thanks. Transcript provided by NPR, Copyright NPR.