- [Bill] What happened with that bankruptcy tsunami? You may recall that in 2020, after COVID-19 hit the United States and cities and states around the country locked down to prevent the spread of the virus, there was a dramatic drop in employment in the United States with unprecedented high rates of unemployment. According to the congressional research service in April of 2020, the unemployment rate reached 14.8%, the highest rate observed since data collection began in 1948. The labor force participation rate declined to 60.2% in that month, a level not seen since the early 1970s. The participation rate means, aside from people who have been laid off and are seeking to get back into the workforce, it measures the number of people who were actually trying to work. And that was the lowest it had been since the seventies. In April of 2020, the COVID-19 pandemic brought the US economy grinding to a halt, predictions of an economic meltdown were common, but something very different happened, we're going to explain what did happen and what to expect in coming months, why? Well, if you practice bankruptcy law, or hope to practice bankruptcy law, or if your area of law interfaces with bankruptcy, then you need to know what to expect going forward. By the end of this training, you should recognize the leading causes of consumer bankruptcy filings in the United States, know the factors that have caused a drop in bankruptcy filings since COVID-19 began, recognize the factors to watch that predict a resurgence in bankruptcy filings. A little bit of me, my name is William Z. Kransdorf and I'm the Director of the Legal Services NYC Bankruptcy Assistance Project, where I've been for the past 16 years. I'm also Adjunct Professor of Law at St. John's School of Law in Jamaica, Queens, New York, where I've for the past 12 years have taught the Bankruptcy Advocacy Clinic. I have a total of 30 years practice in Indigent Legal Services, Bankruptcy, and Labor Law. I graduated from Harvard Law School in 1992, and from the University of Chicago in 1989 with a BA in History. A little bit of background first. It's important to understand some basics about bankruptcy, some underlying causes of personal bankruptcy. While two thirds of debtors cite medical expenses or illness related work loss as contributors to their filing bankruptcy, this according to a study done by Robert Lawless, David Himmelstein, Deborah Thorne, Pamela Foohey, and Steffie Woolhandler in Medical Bankruptcy, Still Common Despite of the Affordable Care Act in 2019, that study showed that in spite of improvements in healthcare coverage brought about by the Affordable Care Act, people were still needing to file bankruptcy, and it was playing a large role in who had to file bankruptcy. Other causes of personal bankruptcy, home foreclosures, common causes, home foreclosure, auto repossessions, small business debts, tax rearages, collection suits and judgments from credit card debt. The financial fallout from divorce is a big one. And it's been pointed out that if a family gets divorced, what had formerly been one household becomes two households supported by the same income earning potentials. Bankruptcy is primarily a women's issue in that most bankruptcy filers are women, they're typically raising children on their own or with inadequate support from their children's fathers, and black households are forced into bankruptcy at twice the rate of white households. This is primarily because of the disparity in household wealth between white households and black households and I'll talk about that more later. I guess I'll talk about it now, it's not just income that sends people into bankruptcy or lack of it, it's also lack of family wealth that plays a hidden role. We're often in this position when we think about what sends people into bankruptcy of looking at what their monthly or weekly earnings are, or annual earnings, and that doesn't tell us enough. In order to really understand what sends people into bankruptcy, it's important to look at what the family's wealth is. And so as Louise Seamster, a professor at the university of Iowa who studies bankruptcy and race, has observed, not only do black family's wealth amount to only one 10th of white wealth, but their wealth was qualitatively different. For example, black families lack the intergenerational inheritances that subsidize things like education and down payments on homes, and that provide whites with a cascade of lifelong advantages. The scope of the disparity is hard to fathom, the 100 wealthiest families on the Forbes list own as much wealth as all of the black families in America combined. Certain events in a consumer's life are often triggers for filing bankruptcy. This could be debt collection lawsuits, judgements from debt collection lawsuits, mortgage arrearages that lead to foreclosure, automobile repossessions, debt collector calls, and letters and threats, these are some of the most common bankruptcy triggers that we see sending clients to us for bankruptcy relief. Consumer bankruptcy in many ways is a substitute in the United States for a welfare state. The United States provides less social safety net protections than other developed countries, such as France, Germany, Spain, and by social safety nets I mean, things like unemployment benefits, paid medical leave, and childcare. Although these things exist in the United States, in Europe they are much more thorough going and enable people to weather temporary financial crises more readily than in the United States. On the other hand, US culture promotes such ideas as risk and fresh starts that mean that access to consumer credit is greater in the US than it is in those European countries, allowing people to manage medical and employment disruptions with debt. The United States has the most accessible bankruptcy relief regime among these developed countries with the concomitant result, I mean, there's a relationship between the freer access to consumer credit and the broader access to bankruptcy relief. People are able to use credit to cope with financial crises, and when the credit becomes unmanageable, they're more able to file bankruptcy than in other countries. Those two things together are reflections of the American ideas that it's worthwhile to take risks and that people should be given fresh starts when things go wrong. Access to bankruptcy is actually not as negative for creditors as you might imagine, and it of course, is valuable to debtors as well, but there are certain advantages to creditors that often go unnoticed, it allows debtors to return to the economy and resume incurring debt, which is how banks make their money. It also ensures against preferential treatment of favored creditors over others, and so in understanding this access to bankruptcy that Americans enjoy, it's important to understand that the law that governs bankruptcy in the United States is heavily influenced by the lobbying and the preferences of the credit card industry and the banking industry, and they have constructed this system in a way that they have calculated maximizes profit for them, it enables people to borrow more money than they would otherwise, and if they get in over their head, there's a system in place to handle that. So that's sort of the context of bankruptcy in which this drama of COVID-19 has played out. So as I mentioned earlier, the impact of COVID-19 on bankruptcy was unexpected, the immediate economic effect of the pandemic lockdown was massive unemployment reaching 14.8% in April of 2020. The pandemic lockdown was followed by a dramatic drop in bankruptcy filings in calendar 2020, over calendar 2019. Instead of that unemployment triggering an increase in bankruptcies, it led to a 30% drop, that drop continued in 2021 and 2022. There were a number of reasons for this drop in bankruptcy filings, one of the most basic was that, at least initially, the effect of the COVID-19 pandemic and the lockdown was to reduce living expenses in that early period of the pandemic, many people were working remotely instead of going into the office, and unemployment as well, eliminated many of the costs of working. So commute costs evaporated, eating out less, people weren't able to eat in restaurants and they weren't eating out at lunchtime, because they weren't at the office, they were at home, there were less clothing expenses, people who were still working were wearing their sweatpants to work, if anything, and they weren't dry cleaning anything, I parish to think of what the COVID-19, especially in the early months, did to the dry cleaning industry. Rent reductions in urban areas impacted even those who continued to commute to work, workers fled cities to avoid COVID-19, and they also were forced to work remotely by office closures, and both of those things, and that in turn, the office closures in turn meant that many employers took the opportunity to reduce their office footprints. Offices have been making ample use of hotelling office space, meaning that instead of people having a dedicated office space, they reserve a desk for a day when they do come in and offices have shrunk dramatically. That's probably not coming back by the way, people are gonna return to the office in fewer numbers than they did before COVID-19. So those two things together meant that business and residential vacancies increased dramatically in the wake of COVID-19 and the lockdown, and that forced landlords to cut rents in order to lure tenants. So all of these things were driving down the cost of living in that period, and finally, during this early period of the pandemic, household savings rose to unprecedented rates as a result of all of these cost reductions. Here you see a chart of the personal savings rate of workers in the United States going from 1960 to 2020, and what you see is that until 1980, savings rates, personal savings rates in the United States fluctuated between 10 to 15% for Americans, and then after the great recession of 1982, 83, personal savings rates began to drop significantly to between five and 10%, and finally, after 2005 dropping below 5% for a time. Personal savings rates had started to trickle up a little bit again after the great recession, after the recession of 2007 and 2008, and remained in that five to 10% band until this crazy moment of COVID-19, when suddenly personal savings rates skyrocketed to between 30 and 35%. So there was a dramatic reduction in people's cost of living in the early part of the pandemic, and that resulted in saving money. And this is important too, because what you're gonna see a little later on is that we had this problem in the United States and the economy of people having a lot of money and not having anything to spend it on. This is the phenomenon of too many dollars chasing too few goods, and that leads to inflation. Loss of access to bankruptcy also played a role in reducing the number of bankruptcy filings, face to face law office meetings were replaced with Zoom and phone meetings, which were far less efficient in terms of getting information from clients and getting documents that are crucial to preparing a bankruptcy petition, tech challenge debtors were particularly out of luck if they couldn't meet with lawyers by phone and internet and Zoom, and the loss of face to face meetings also has hindered the building of trust between practitioners and their clients, a trust that's important to make clients comfortable going through the difficult process of consumer bankruptcy, so that also slowed the number of people who are able to complete the bankruptcy process. It's also true that potential filers were preoccupied with some other big things going on at the time, the pandemic disruption brought a respite from debt collection calls, foreclosures and evictions, and at the same time, other crises were competing for those consumers' attention. Schools were closing, jobs were being lost, they were changing jobs, or the way they did their jobs was changing, we were reorganizing our lives around COVID avoidance. Does anybody remember the videos on YouTube about how to wash your produce when you get it home and how to maintain a sterile area? I mean, there was a whole new skill set that came with COVID-19. Our mental health was challenged substantially by all of these crazy disruptions in our routines, in our lives, and that took a toll on the bandwidth that people had to deal with things like filing bankruptcy. And of course, actually getting COVID or caring for somebody who had COVID, took a toll on people's availability to deal with their debt through bankruptcy. Federal laws played a significant role, perhaps the largest role in mitigating the financial impact of COVID-19. There were two main acts that were passed by Congress as a result of COVID-19, the first one was passed in April of 2020 called the CARES Act, the Federal CARES Act, and the second passed in March of 2021, the American Rescue Plan, each of these acts contributed programs designed to put money in the pockets of people, of ordinary American citizens in a very direct and powerful way, and on a level of government intervention not seen since probably the great depression. I mentioned earlier that European safety nets are more capacious than those in the United States, but for one brief shining moment in the United States, that was not true, the government, first of all, imposed moratorium on mortgage foreclosures and evictions, which meant that many people who couldn't make their mortgage payments or their rental payments were protected from the kinds of financial catastrophes that might have resulted from the job losses that were happening all over the country at that time. People received stimulus checks, $1,200 in 2020, and a combined total of $2,000 in 2021, which to be honest, is not a lot of money to a family, to a household of four, but in the aggregate, these amounts were very powerful stimuli and helped ease a lot of the impact that American families were suffering from as a result of the job losses and disruptions of COVID-19. Perhaps the biggest impact to American workers who were struggling with job losses during this period was the unemployment supplements imposed by Congress, in April of 2020, Congress implemented an extension of unemployment benefits combined with a $600 a week unemployment supplement, which was really pretty radical for the US Congress, that meant that quite a few workers were actually making more money from unemployment benefits than they had made on their jobs, that was unprecedented in American history, and probably be because of that, that program was terminated in July of 2020, after only a few months, and of course, many of the Congress people who argued against extending this unemployment supplement made the case that this very fact that people were making more from unemployment benefits than they were from jobs, was the reason it needed to be stopped, because how pernicious and awful could it be that people were being discouraged from going back to work, they were making more money on unemployment, why would they want to go back to work? And of course, you don't want to have a program that discourages people from going back to work, right? Actually during a pandemic, when you want people to stay home, it might make sense. There's an argument that that was a very good program to discourage people from going out, going into the office, or going to the factory or the warehouse, but that was a short lived level of assistance. It was replaced in March of 2021 with another supplement of $300 a week, which continued on until September of that year. That supplement also was coupled with an extension of unemployment benefits that ran out in September of 21, what I mean when I say an extension, normally unemployment benefits last for six months, and after that, you're on your own, but the extension of the base unemployment benefits aside from these supplements, that extension of the base benefits meant that people's unemployment did not run out after six months, but continued on until September 5th of 2021. So the combination of extension of base benefits plus these supplements was a huge help, a huge lift to people who had lost their jobs as a result of the COVID-19 lockdown, pandemic lockdown. There were also childcare tax credits, child tax credits of 3,000, or $3,600 per child, which was a tremendous lift for, as you may recall, I mentioned earlier that many of the people filing bankruptcy are single mothers struggling to survive without adequate support from their exes, and the child tax credit was, again, it was a small amount of money on an individual basis, but in the aggregate, it helped a lot of people manage through this very difficult time. Emergency Rental Assistance was a program enacted in the second, the American Rescue Plan Act, and it provided for grants from the federal government that tenants could use to catch up the rent when they were behind on the rent. The payments didn't go to the tenants, but directly to the landlords, there were problems with implementation of ERAP program, and people were often waiting months to get their ERAP checks to catch up the rent, but it was nevertheless, a lot of money was distributed to save people's housing from eviction through that program. You probably heard of the Paycheck Protection Program, which was a loan program operated by the small business administration, in which the government provided loans to help employers, small business employers, theoretically small business employers, to make payroll in the wake of dramatic losses of revenue as a result of the pandemic. And finally, student loan moratoria on both the payments and interests, so during the student loan moratoriums, people with student loan debt are not required to make payments and interest is not accruing, people can, of course, make payments, and it is an opportunity for people to pay down their student loan debts, because every payment is paying down principle, there's no interest accumulating, but the fact that people are not required to make student loan payments and that the loan balance is not gonna grow while they withhold their payments has been a significant boost to people laboring under student loan debt. In addition to the federal programs, states also enacted several programs in their own capacities to ease the burden the impact of the COVID-19, the economic disruptions, they halted foreclosures, they halted evictions, and either through design or through practical outcome, they limited or restricted debt collection actions as well. Many states imposed eviction foreclosure moratoria that supplemented the federal programs, where I practice in New York, the state eviction and foreclosure moratorium were very powerful, one of the amazing facts about the eviction moratorium in New York was that eviction cases in housing court were converted to money judgements, which means that a person could file a bankruptcy and discharge back rent in bankruptcy and not be evicted as they would normally be without this New York State eviction moratorium. So that might have meant more if people were filing more bankruptcies, but as it happened, people were filing few bankruptcies and few people were taking advantage of that. So another significant impact at the state level though, was that state courts, which is the place, the sites where debt collection lawsuits get processed. The state courts close their doors during the pandemic, because of concerns over the spread of the virus, and that meant that many of the normal transactions that the courts were carrying out ceased to go forward, and in particular, at least where I practice in New York, debt collection lawsuits ground to a halt. Judgements ceased to be processed beginning in April of 2020, and they did not really resume processing debt collection judgments until January of 2022. That not only stopped the entry of debt collection judgements, but it also slowed greatly the filing of new debt collection lawsuits, so for two years, creditors who wanted to sue debtors in state court were often holding off, even if they could file a debt collection lawsuit in court, they would hold off, because they knew that they wouldn't be able to get a judgment in any event, and that discouraged the filing of those suits. It's safe to say that all of these government interventions averted in economic catastrophe during the COVID-19 pandemic. As Ed Flynn, a consultant with the American Bankruptcy Institute observed, clearly people, mainly through government actions, have not yet felt the pain and have not had the type of event that would precipitate a bankruptcy. They may not be paying their rent or their mortgage, but they are not being foreclosed on yet. So that was in March of 2021. However, now in 2022, most COVID-19 safety net provisions have sunset. Everything I described earlier with one notable exception is already gone, federal mortgage moratoria ended, the Federal Mortgage Moratorium ended in January of 2022, the National Eviction Moratorium ended in August of 2021, the unemployment supplements and the unemployment extensions ended on September 5th of 2021, the child tax credit ended on December 31st, 2021, the Payroll Protection Plan, or PPP loans, ended in May of 2021, and the ERAP program ended in December of 21. Now, I mentioned earlier that the ERAP program was very slow to doll out the money that people qualified for to get those rental catch up payments, and so one of the problems was that people had gotten applications in before the program ended in 2021, and those payments are still being processed at the state level, so there are still people who are getting ERAP payments, they're trickling through, but one of the problems with the ERAP program is that the idea was that this was going to bridge the gap between people who had stopped paying rent and were benefiting from that moratorium, but now that the moratorium had ended in August of 21, they needed to get caught up on the rent or they were gonna be evicted, well, the ERAP program was supposed to be the solution or the answer to that, but unfortunately, people are still waiting for their ERAP checks to get their rent caught up and some people are being evicted as a result. The last of these protections, these government instituted protections to fall is the student loan interest and repayment moratorium, which ends on August 31st of 2022. So at the moment, student loan debtors are still able to hold off on making student loan payments without penalty and without the loan balance, the loan principle increasing, but that's ending in August of 2022, and with that, all of the programs that were passed by Congress and as far as I know, the states that were easing the pain and the harm of the COVID-19 economic disruptions will have ended. State protections have also ended, some protections had ended early on, even in 2020, such as the Texas Eviction Moratorium, but in New York State, for example, the foreclosure, and New York state is an example of a state that provided some of the most capacious COVID-19 supports to residents of that state, their Foreclosure Moratorium ended in January of 2022, their Eviction Moratorium ended in May of 2022, and the funding that they were able to distribute to tenants or to landlords through the ERAP program has also ended, meaning, it's because the federal ERAP program has ended, the state ERAP programs have largely ended as well. So what is the road ahead as we look towards the end of all of these federal protections that had been tidying people over through the COVID-19 disruptions? So first the good news going forward, the unemployment rate that had looked so ghastly in April of 2020, has now essentially returned to where it was before the pandemic, and that's a very low unemployment rate, in historic terms, we have rarely seen unemployment below the level of 4%, but that is where it's at now. One caveat about this number is that many workers have left the workforce, you may remember back when I was describing the effects of COVID-19 in April of 2020, there were two numbers I mentioned, one was the unemployment rate, but the other was the participation rate. The participation rate continues to be low, although it is better than it was in the early part of the pandemic, it has recovered somewhat, but it remains at a historically low level, as you can see here. So that's the good news, and the less good news about employment, more people are back at work and they're making money. But the clouds are gathering on horizon in general as we look forward into the future, debt collection is back, and it should be back with a vengeance in the coming months, in New York City, civil courts mostly had halted the processing of debt collection judgements since April of 2020, and they're now processing those judgements. And that's important, because not only does it mean that those default judgements, those judgements have been accumulating for two years and are now going to start being processed, it also means that creditors now have an incentive to resume filing new debt collection lawsuits in the state courts, so every indication is that we're going to see a significant increase in the filing of debt collection suits in the coming period, as well as a significant increase in the entry of debt collection judgements, which is likely to drive people to seeking bankruptcy relief. Of course, evictions and foreclosures are no longer barred by the protections of the pandemic acts, and in New York City, for example, these are just beginning, though, in other jurisdictions they had resumed earlier. It's important to note that rents, which had dropped dramatically in 2020, are now back up, the drops were in urban areas where people were trying to avoid congregating, that drop has evaporated, the drop in rent has evaporated and rents now have surpassed pre-pandemic levels in most urban areas. Inflation driven rent increases mean that rents are now on their way to being higher than ever before as the inflation rate drives up the cost of housing. So that brings us to inflation, inflation is back, low inflation had been a source of economic strength in the United States for the past 40 years, since about 1980, that low inflation has in turn allowed the federal reserve room to lower interest rates, which has made it easier for people to buy a house, buy a car, or expand a business, and to weather problems such as job losses and changes in business climate by using credit. So let's take a little look at inflation and where it's gone and where it's going. The inflation rate in the United States, you see in this chart here, in 1960, this was the historic level was below 2%, and then it began to climb significantly in the nineteens, especially in the 1970s, and by 1979, inflation had reached a historic high of 13%, almost 14% per year. And that moved the federal government to swing into action, inflation is this funny thing that is really bad if you have a lot of wealth. So people who own things with high value that are sitting, assets that are sitting there, in particular cash assets, inflation has a way of eating at the value of those cash assets, if you've got money in the bank today, and there's 14% inflation, that means that a year from now that money that you have, even if you haven't spent any of it, is worth less, because of inflation. And so whenever an economic development is painful for wealthy people, you can expect that Congress and legislatures are going to scramble to try to take care of it. That's not to say that inflation isn't bad for poor people as well, it is, but that particular impact of inflation on wealth is probably the most important driving force when policy makers and elected officials are feeling the need to address inflation. As you can see in 1980, there was a precipitous drop in inflation after reaching that high point, and that drop was not an accident, it was something that was brought about by federal intervention, the federal intervention was in the form of interest rate increases, the board of governors of the federal reserve instituted dramatic increases in the rate at which banks could borrow from each other, this is called the federal funds effective rate, the federal reserve sets the federal funds effective rate, and it determines the interest rate at which banks charge each other for overnight loans to meet their reserve requirements, now the thing about federal funds effective rate is that it drives all of the loan rates that banks charge for their customers for various loan products. If they set a mortgage rate, it's gonna be determined by that federal fund's effective rate plus some other number, an auto loan rate, again, the baseline is what is the federal fund's effective rate, and they add some percentage of that based on their marketing calculations, but always this federal funds effective rate is the baseline that determines what interest rates are going to be for these loans, and so by increasing this rate, the federal reserve is able to impact the interest rate that banks charge to lend money to people.

- [Presenter] It's important to understand that this inflation may be less responsive to the remedy of increasing interest rates. The current spike in inflation is driven by real world disruptions in the supply of goods and services. The great resignation, where a number many people since COVID-19 have just dropped out of the workforce, the fact that there have been these massive disruptions in the supply chain, partly driven by that great resignation. There are other disruptions caused by the Ukraine, Russia war, which has impacted the supply of both fossil fuels and wheat. All of these things are spiking inflation. The current inflation wave is a global phenomenon, it's not restricted to the United States, so the policies of the federal reserve are gonna have obviously less influence on the price of foreign goods and services than they would be if this were a US specific inflation. This is really an inflation that's beyond what the, this is not a US phenomenon, it's a world phenomenon that we're facing right now. So there's actually, because of that, there's a possibility of the worst of both possible worlds, that increased interest rates are gonna slow the economy causing a recession without actually tainting inflation. And so far, increased interest rates have not slowed inflation, hasn't been shown in the latest inflation numbers. So there's reason to think that we could be up for a rough ride here.

- [Bill] As of June 20th of 2022, the federal reserve had increased this interest rate to 1.75%, which may sound insignificant when you're looking at what it was in 1980, when it had reached a peak of around 18%, so obviously 1.75 is small compared to that, nevertheless, what you can see here at the right end of this chart is that for the past 10 years or more, the interest rate has been at or near zero, the federal fund's effective rate has been in at or near zero, there was a moment in 2019 when it got as high as 2.5%, but it fell back down, and we are now in the upswing. And we're in the upswing in a context of greater inflation than was true in 2019, and probably a greater inflation rate than any of us has seen since 1980. So the expectation is that the federal reserve is gonna continue to follow a policy of increasing interest rates in order to bring down inflation, and here's the thing you need to know about that, the cost of using high interest rates to bring down inflation is that as interest rates go up, consumer debt that had been affordable becomes less so, so if you were gonna buy a house with a mortgage, and the mortgage rate was 2.5%, the amount of house you could buy with that interest rate would be much greater than when the interest rate has gone up to 3.75%. So as the interest rates go up, everything becomes more expensive if you have to borrow to buy it. So that means that mortgages are gonna become less affordable, cars are gonna become less affordable, you'll see increased costs of business borrowing that have a ripple effect on less business expansion, less hiring, less construction work, and when you add all of those up together, what you get is recession. Things become too expensive for people to pay for, and so they stop buying things, and then people get laid off. So why is this inflation happening now? We have been going along for 40 years without the kind of inflation we're seeing now, and as of May of 2022, the inflation rate is up around 8.4%, which is not as bad as it was in 1980, but it's worse than it's been since 1980. Why is this happening? The typical explanation for what causes inflation is too much money chasing too few goods and services. When that happens, when there's all this money out there, but there isn't enough for people to buy with it, then the goods and services that are out there can be sold for a higher price and people will pay it. You can see this, for example, in the startling increase in gasoline prices, which so far has not resulted in a reduction in the amount of miles people are driving, so the price goes up, people don't change their habits, that means that businesses, for example, in this case, oil companies can continue to raise the price of gasoline, even though they're raising the price beyond, these increases in price have nothing to do with, or the increases in price have little to do with reductions in the availability of gasoline. Oil companies are able to increase the price of gasoline that they charge, because the market will bear it, and that increase does not necessarily reflect a lack of supply, there's an indirect relationship to the lack of supply, but the real event is that they're able to raise the price because people have money to spend, and so they're spending it. Much attention is often made during times of high inflation to corporate profits, which tend to skyrocket with high inflation, and so the critics of corporations will often point to this and say, the reason we have inflation is because corporations are profiteering, and that's absolutely true, but it's also kind of beside the point, it's the job of corporations or of businesses to charge as much as they can for the goods and services they sell, and to expect them to do otherwise is to expect them to follow some rule other than the market rules that they operate under, so yes, prices go up because they can, and when people can't afford those higher prices, then prices come back down. So on some level, what the federal reserve is trying to do by increasing interest rates is to suck up some of that excess money that people have, which is allowing prices to go up, and force it instead of being spent on goods and services, to be spent on loans, on the cost of money, which means that banks, of course, and of course, when you raise interest rates, when banks raise interest rates, that means they're gonna make more money from their loans, so they're also gonna profit from increased interest rates. So all of this is designed to bring inflation under control in effect, by bringing about a recession. And if you look at those charts that we've been looking at, where you see the federal funds effective rate, go reaching up a high peak, it's immediately followed by a drop in the interest rates, and you see a gray band to show you where the recessions are. So increases in interest rates bring about a drop in inflation, but it's tied directly to a recession. So the dramatic increase in interest rates in 1979 and 1980 led to the great recession of 1982 and 83, increases in interest rates in 2005 through 2009 led to the implosion of the great recession of 2008 and 2009, etcetera. Higher interest rates also have some benefits to debtors that are worth noting, debtors who have gotten mortgages or long term loans at fixed rates can actually profit for the same reason that we described earlier, debtors who have locked in fixed rates can profit, as money becomes worth less, long term debt, such as mortgages, becomes smaller in real terms. So a $400,000 mortgage in 2022 might only be worth $350,000 in 2032 in 2022 dollars. But debtors with adjustable rate mortgages may be in for a rough ride. Adjustable rate mortgages were at the heart of the mortgage meltdown in 2007, 2008, 2009, when debtors suddenly found that the very affordable mortgages they had gotten for their homes that started out with teaser rates, suddenly the rates would change after a year or two years into the repayment plan and their monthly mortgage payments would balloon under higher interest rates. In many cases, those teaser rates were complete nonsense, they bore no relationship to the cost of the money that had been borrowed, and when the actual loan payments were adjusted to reflect the amount of money that had been borrowed, it was completely unsustainable, well, those kinds of adjustable rate mortgages were in many cases toxic, and to some extent have been eliminated by the banking industry in the wake of that financial meltdown, but adjustable rate mortgages are returning now, and some of the features of those adjustable rates are going to cause trouble for people if they borrow money with an expectation that their monthly mortgage payments are not going to increase significantly. So a person whose adjustable rate mortgage is now $3,000 a month, based on an annual interest rate of 2.5% will suddenly find themselves having to pay perhaps $3,500 a month when the interest rate goes up to 3.5%, and that can be unsustainable for people. So it remains to be seen how many adjustable rate mortgages are going to be out there, getting people in trouble, it's only just a beginning feature, but that is a worrisome development. As I mentioned earlier, COVID briefly raised household savings. Here you see a diagram that shows, that same diagram I showed you earlier with household savings, but continued on past April of 2020, I had deliberately cut off the end so that I could show you what happened to that household savings, it dropped precipitously through the rest of 2020 and household savings is now back to the level, the personal savings rate as of April 2022, is now down to 4.4%, so personal savings is now significantly below where it was before the pandemic. It's also important to know that household debt loads are going up and have been going up for some time before COVID-19, they reached a low point in about 2013 and have been slowly creeping up since then, particularly driven by housing debt, but non-housing debt has been playing a role in increased debt as well, so whereas in 2013, the total debt balance was around $11 trillion, it's now up to around 16 trillion, a significant increase. The non-housing debt balance breaks out in some predictable and unpredictable ways. Student loan debt has increased dramatically from what it was in 2004, dramatically. It's important, when people talk about the student loan debt crisis, there's a problem here that was described by professor Louise Seamster at the University of Iowa, that the idea that people have been saying that there's a student loan debt crisis for so many years, that it stops having any meaning, and so people don't realize how much worse the student loan debt crisis is now than it was back when it was being described as a crisis in 2004, to put it in perspective, student loan debt, most of the student loan debt in the United States was accrued in the last 10 years. So most of the student loan debt in the United States was accrued in the last 10 years, so there's an enormous amount of student loan debt that's piling up over time, and as you may know, this has generally been non-dischargeable debt in bankruptcy, so this is an enormous drag on the economy and on people's ability to manage their other debts. Credit card debt has more or less stayed the same, there was a dip in credit card debt that you see here at the beginning of the COVID crisis, but it seems to have gone back up, and auto loan debt has increased steadily since 2010. You don't see any areas where debt is going down, and when we start talking about debt delinquencies, you see that delinquencies have mostly been going up, although there are some downward trends that you can see, mortgage delinquencies have been going down since 2010, and home equity lines of credits, similarly, have been going down since 2010, but other areas of debt, such as auto loans, credit cards, and other areas of debt have been either going up or holding steady. You see some dips in credit card debt in 2022, but generally speaking, these areas of debt have been holding steady. Now, one thing that hasn't held steady here, you see the student loan debt took a precipitous drop beginning in 2020 and lest anybody, this is delinquencies, lest anybody think that this means student loan debt is becoming more under control, it's not. This drop is 100% a result of the student loan payment moratoria and interest moratorium that in effect, it's impossible for most people to be delinquent on their student loan debts when student loan debt payments aren't due and interest is not accruing. So all of these things taken together, pretend of storm clouds gathering on the horizon. We've got a debt collection backlog, we've got inflation back at levels we haven't seen in 40 years, we've got a cost of living, let me summarize, unemployment is low again, but unemployment participation rates remain below normal, debt collections, which had been paused or slowed have resumed and are expected to increase significantly in the coming period. Inflation has become a significant factor in family's abilities to make ends meet for the first time in 40 years. Household savings, after going up briefly, is back down to the basement, that money's been spent. And household debt has been steadily building, non-mortgage loan delinquencies have been holding steady during this period. Taken together, these factors suggest that while a sudden increase in consumer bankruptcies is possible, a more certain outcome is that demand for bankruptcy filings will increase gradually as the last government COVID relief measures sunset and federal anti-inflation policies work to slow down the economy.