BANKRUPTCY EPIDEMIC ON HORIZON Friday,November 17,2000 By JOHN CRUDELE

--------------------------------------------------------------------------------

BEFORE you start shopping for Christmas gifts, consider this. Personal bankruptcies will increase a whopping 10 to 20 percent next year, according to SMR Research. And with the stock market suddenly no longer making people feel very wealthy, that estimate could be low.

This isn't one of those research outfits that loves bad news. SMR is probably the only place to correctly report that bankruptcies would decline in 1998 and '99.

"It's mostly a continuation of an upward trend which has been going on for 10 years now," said researcher George Yacik of next year's trend.

The difference from the last two years? In 1998 and '99, "people on the edge were able to refinance their debt and take the heat off," Yacik noted.

That trick works only if rates keep going down. Since last year, the Federal Reserve has raised borrowing costs six times because people, feeling too affluent, were driving prices too high.

The Fed got what it wanted. People no longer feel rich. But the reasons why there will be so many bankruptcies is much more complex than just the actions of Greenspan & Co.

There's the growth of gambling in this country. And more and more people find themselves without health care, so one good-sized illness puts them over the solvency line.

There are also lots of divorces. And lawyers, of course, have been pushing bankruptcy as a way to solve financial problems, even as Congress is trying to tighten the laws.

But the biggest reason more people are expected to go bankrupt next year is simple: Americans - already profligate - got into the habit of spending way too much at a time when wealth was being created artificially by the stock market bubble rather than in the paycheck.

Here are some numbers.

In 1998, there were 1.38 million personal bankruptcy filings. In 1994, the number was only 770,000.

But bankruptcies fell to 1.26 million in 1999, mainly - SMR said - because people were able to two-step their way out of bankruptcy thanks to banks willing to lend them money against their home's equity.

According to the latest government numbers, one-quarter of homeowners have less than $1,000 in the bank. Another 27.5 percent have between $1,000 and $5,000 in the bank. And because of the declining savings rate in recent years, fewer non-homeowners have the three to six months' worth of salary stashed away as a buffer against disaster. And those figures are from 1995, when the savings rate was higher. The situation has probably gotten worse since then.

Bankruptcies started to climb this year, but 2001 is when the researchers expect the real jump to record levels.

Aside from the tightening of credit, the main culprits this time will be higher energy prices and the uncooperative stock market.

Most of the wealth created in this country over the last decade came from the stock market bubble. The bubble isn't gone yet. But the market's deflation in the last few months - amplified more than adequately by the media - has caused investors to become more cautious.

That newfound caution will help.

But the next wave of bankruptcies is already locked. People who made purchases and plans based on yesterday's perceived wealth and estimates of future capital gains won't be able to pay for their dreams.

The situation will be worse, of course, if the economy doesn't slow gently or the stock market takes a big dip.

David Levy of The Levy Institute said, "The chances are 2-to-1 that we will have a recession in the next 12 months."

"The total debt - personal and corporate - has been growing faster than income, especially during the past 20 years. There is a constantly increasing strain on people," he added.

Levy believes if there is a recession, bankruptcies could become a lot worse than even SMR is forecasting.

http://www.nypostonline.com/business/16319.htm

-- Carl Jenkins (somewherepress@aol.com), November 17, 2000

Answers

The significance of this article, and so many others lately, is not so much the content but where it appeared. The "mainstream media" is now discussing what many of us on this board have been muttering about for several years, on the "fringes."

The coming economic shock: it's not just for survivalist nutcases anymore!

-- Andre Weltman (aweltman@state.pa.us), November 17, 2000.