The credit market is strained but growing; crypto’s historic hack

Credible growth

My general working hypothesis about economic growth is that as long as the credit market is expanding, everything else is secondary. Yes, inflation is too high and it’s a real burden for lots of people and I get sticker shock every time I’m in a grocery store. The jobs market is marginal and wage growth is not keeping pace. And those things do of course affect the credit market. But until the credit market stops working, it is still growing. I know that sounds obvious, but it’s important.

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We have a few stories that shed some anecdotal light on the state of the credit market. Newtek, which is the largest Small Business Administration lender in the country, said high interest rates and inflation resulted in a higher level of problem loans in its portfolio, our John Reosti reported. It has been particularly acute for borrowers who took out loans before 2022, the company said, when rates started rising. The company’s third-quarter earnings fell 40%. “There’s been stress on the historic portfolio,” CEO Barry Sloane said.

Meanwhile, the company formerly known as LendingClub, which now calls itself Happen Bank, saw a sharp increase in its earnings as a result of, well, people taking out new loans, our Melinda Lucy reports. Originations, mainly personal and home-improvement loans, rose 26%. “Customers have so much equity in their homes and are sort of stuck,” CEO Scott Sanborn said.

It’s impossible to draw any conclusion from that except for the fact that the credit market is so big some people are struggling and others aren’t. 

The overall problem with credit is that it has a tendency to grow and grow and grow until it becomes a problem, thanks to the miracle known as compounding interest. Former Treasury Secretary Hank Paulson, who was in that job the last time the credit market melted down, warned that the current national debt, which topped $40 trillion a month ago, has become unsustainable. Our Nathan Place tramped over to the Economic Club of New York for the speech.

“If not addressed, it will strangle our economy,” Paulson said. 

He  isn’t the first to say that, of course. Profligate spending by the federal government has been a concern for decades. The reason it hasn’t blown up in our faces is complex, but it can be boiled down to the fact that our creditors overall believe that we’re still good for the money, that the world’s largest economy can continue to service its debt.

The problem with that is that the debt is now spiraling higher — interest payments are now more than $1 trillion a year — thanks to the miracle known as compounding interest. At some point (and you could make a fortune if you could predict it) our creditors will change their mind about us. 

Binance robbery

People rob banks. Sometimes it’s an inside job, sometimes it’s a Dillinger-style heist. Usually what they are stealing is cash, because cash is largely untraceable, but cash has its drawbacks, the main one being that you can carry only so much of it. 

You can, though, carry a virtually unlimited amount of digital money on a thumb drive, which makes cryptocurrencies a very lucrative target. Binance, the world’s largest cryptocurrency exchange, acknowledged last night that somebody had stolen about $6 billion worth of cryptocurrencies from its accounts, our Carter Pape reported, which many are reporting as the largest theft in the industry’s nearly 20-year history (though the website rekt.news, which tracks crypt thefts, notes a bitcoin miner named Lubian lost $3.5 billion in 2020, which would be worth $14 billion today).

The exchange said it was suspending withdrawals, and deposits for that matter, on its platform and pledged to make its customers whole. I suppose on one level it’s kind of impressive that Binance has that kind of money sitting around, but still shutting down its entire platform and draining $6 billion from its reserves is a big expense. By comparison, “London Whale” trade Bruno Iksil cost JPMorgan $6 billion. If Binance was a publicly traded company, fines would be on tap and an executive or two would probably be getting fired. They may anyhow.

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The reason people steal cryptocurrencies is because most of them are designed to mimic physical cash in that they are digital bearer bonds. If you hold the “keys” to the wallet that contains the money, you hold the money. The stablecoin issuers Tether and Circle froze more than $2 billion worth of the stolen money, because they have designed their systems differently. But that still leaves $4 billion out there beyond reach. It’s probably gone.

Dillinger would have loved crypto markets, but these are the issues banks will have to contend with before they really embrace digital money.