Credit cards unkindest cut for U.S. consumers

By J Saft
December 3, 2008

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own –

Government intervention or not, banks will be cutting up America’s credit cards at an unprecedented rate, with grave implications for the economy and company profits.

The U.S. Federal Reserve last week added more nutrition to its alphabet soup of rescue programs when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend up to $200 billion to investors in securities backed by credit-card, auto and student loans.

It did so for a very good reason: the securitization market’s freeze now extends beyond mortgages, imperiling run-of-the-mill consumer financing and making it a certainty  that many people who use credit to get them over “cash flow” situations will be, well, denied.

And even though the U.S. car industry may implode if starved of finance and many students will have to defer education, the real potential disaster is in credit card funding, which could push lots of households over the brink and in the process consumption and every business which depends on it, which would be all of them.

Put simply, even with an apparent will to try anything to bring the wheels of finance back into motion it will be very difficult for government to quickly fill the hole left by private finance. Details of the plan are still sketchy, but let’s just take it for granted that it works, even if the plan, at only one year, will give them huge fears about how they get out of their positions at the end of 2009.

Beyond that, the Fed is seeking to kick start securitization by attracting back a species of investors, leveraged ones, who don’t really exist any more.

All other things being equal, the amount the Fed is putting into the TALF should take the ABS market back to about where it was in the first half of 2008, which itself was only a third of the volume we saw in 2007.

But all other things are not equal.

The banks that provide the bulk of credit card funding  generally want to cut back, pushed by their own woes, a conservative read of the economic situation and, potentially, regulatory changes that, while intended to ward off the excesses of the last bubble, will magnify the impact of its bursting.

Meredith Whitney, the Oppenheimer and Co analyst who has so far been ahead in identifying and explaining the weaknesses in the banking system, thinks over $2 trillion of credit lines, or 45 percent of lines available, will be pulled out from under American consumers in the next 18 months, a figure that puts the Fed’s $200 billion for asset backed finance in its proper perspective.

“We are now entering a new era within the financial landscape that will be characterized by expanded forced consumer de-leveraging with a pronounced downshift in consumer spending,” she wrote in a research note.

“We view the credit card as the second key source of consumer liquidity, the first being their jobs. Pulling credit at a time when job losses are increasing by over 50 percent year-on-year in most key states is a dangerous and unprecedented combination, in our view.”

BIG BANKS ALL WANT TO CUT BACK

Whitney notes that the three largest credit card lenders, Bank of America, Citigroup and JP Morgan, who between them account for more than half of U.S. credit card outstandings, have each discussed reducing card exposure or slowing growth. Capital One and American Express, who are another 14.5 percent, have also talked about limiting lending.

That will set the tone for the rest of the industry, which will be grappling with new regulation that, if goes ahead as planned, will impair profitability of credit card lending and push more off-balance sheet securitizations back on to the banking industry’s already strained books.

Cutting back on abusive lending and forcing banks to recognize and account for the risks they take are surely good things, but will have the perverse effect of making the credit crunch worse, at least temporarily.

And looking at the balance sheets of individual Americans, there is good reason to think that the credit crunch should get worse: that they should consume and borrow less and save more. I’d argue that far from being non-functioning, financial markets are closer to pricing in the true risk of lending to consumers now with credit cards charging about 10 percentage points more than 5-year Treasuries than they were six months ago when it was only about a 7.65 percentage point gap.

But the mother of all unintended side effects is that the faster consumers cut back, the worse it will be.

The kind of consumer cut back implied by the consumer credit crunch that now looks likely would blow a hole below the waterline in the U.S. economy, and in U.S. company profits and the stocks that reflect them.

The Federal Reserve and U.S. government’s use of unconventional measures is only just beginning.

–  At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For more columns by James Saft, click here. –

For full coverage of the crisis in credit, click here.

62 comments

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A piece written by Micahe Farrell; “Welcome To the Keynesian Nightmare” spelled out the dilema many months ago. “It is no secret that the US is a country driven by debt. It now takes approximately $3.25 of total debt in the US to generate $1 of GDP, a significant increase from 1952, when it took just $1.30 in debt to generate $1 of GDP. However, in 1952, government debt—federal, state and local— was $244 billion and accounted for 55.1% of the $443.6 billion in total debt outstanding in the US. Today, government debt stands at $7.2 trillion but accounts for just 15.7% of the $45 trillion in total debt. Household debt today has a much larger impact on economic growth than government debt— at $13.6 trillion, it is almost twice as much as government debt, while in 1952 it was just one-third of government debt.”
The unwinding of U.S. consumer debt is underway. The implication is that the economy will not bounce back to what it was. It will be “pay as you go” for some time to come.

Posted by Paul | Report as abusive

Credit cards fuel impulse buying. Now I plan the purchase in advance – only charging if I already have the money set aside to pay the bill.

At the same time, credit cards helped get me through school. It temporarily masked bigger problems – like lack of financial support, income or high educational costs. My advice to students today is, if you have no choice but to use your credit card to pay for school, you are in the wrong educational program.

People talk about the love of learning and protecting the academic nature of an educational environment. Learning happens over the course of a person’s life. In light of limited resources, learn to the extent those resources pay for the costs. Never roll a credit card balance to pay for school.

Posted by Don | Report as abusive

It is time that American’s learn to spend less, save more, live within their means (that is available cash) and give back to community through volunteerism, service projects and so much more. We are a resilient country and people – knowing what it is like to help others in adversity – building ones life on a debit mentality only staves off problems that will eventually surface as well as creates an individualistic sense that one can go it alone. Very few people have the personal discipline not to impulse spend and pay back loans in a reasonable time. Our current economic situation is requiring a restructuring of our sense of worth – it is in people, not things.

Posted by Torrie | Report as abusive

Excellent points Don. I think we need a massive correction to the economy and how it functions. A lot of things – including over-priced education that just doesn’t deliver – needs a big cold shower of reality post credit cards. Too many people and things have been getting a soft ride because they make others fall back on credit cards for the cash. It has introduced inefficiencies and slackness into the economy that shouldn’t be there. If you need a credit card to prop up your salary, your education, your anything, then there is something seriously going wrong. Change your game because you are on the wrong track.

Posted by Bob Macdonald | Report as abusive

Grow some cahoonas America. I worked all night and went to school all day. Never borrowed a dime to finish school. Although very poor, I was denied financial aid because I was not a minority. Lived in public housing (“white projects”) as a child. Live as a frugal millionaire now. Worked 75 plus hours a week for many years to get here. You can live beneath your means and do it too. Quit crying babies. Your heritage requires more from you.

Posted by kelly p | Report as abusive

I have worked this problem many times in the past on a individual level, but the same principles apply to the total economy issue.
In the past when clients of mine have approached me with out of control operating lines and credit card debts, but the question of rapid reduction by demand or cut off is more dangerous to the total situation as it would likely destroy their businesses, a work out situation was achieved where possible.
The non-revolving portion of the debt (that portion which never seems to get paid down) was termed over a reasonable horizon, and the discretionary limit reduced by that amount as well. The business could spend, but at the same time was now in a commitment to reduce the over all debt.
In this scenario, if the credit card companies could work this out, it would permit the consumers to continue to spend reasonably, as they are likely doing in the environment anyhow, without having to bring all of their past indiscretions due immediately. Enough breathing space would be permitted to catch up.

Posted by Mark DOnaghy | Report as abusive

I think that before the government makes this move they need to seriously consider the consequences. Many people use credit cards to eat on a daily basis.
The government first needs to address the #1 issue in America today, NO JOBS or jobs that require a minimum of 60 hours work and pay the equivalent of 20 hours! How about we start seeing the trickle down economics finally taking place. There is absolutely no excuse for 5% of the population holding 95% of the wealth in this country. Time for those earning 20 million dollar bonuses on the backs of those of us earning minimum wage to feel the heat! There is plenty of money to go around, but it won’t move around if one person invests it in 10 luxury vehicles for himself, while in the next town a person is using his credit card to buy lunch. I’m all for hard work but lets be honest with ourselves.

Posted by George | Report as abusive

I just had a card account with a big limit I wasn’t using cancelled by the bank for non-use. They’re evidently afraid people are going to start using their no-balance cards as times get tougher…I’d been with them since ’94. It was kind of a surprise, but I’m sure just a sign of the times…..

Posted by Marc | Report as abusive

TO kelly p….

“Worked 75 plus hours a week for many years to get here.”

Uhh….What’s that? To get where? Lottsa dollas?

Is that what life is about? 75 hours/week for dollars?
As in SEVENTY FIVE?

You’re kind of cheap. Or your thinking is.
Or maybe just your life.

Just dollars, baby!

Best,

Charlie

Posted by Charlie | Report as abusive

Why can’t the big shot CEO’s cut back on private jets, limosines, and bmw’s?? The last company I worked for, the president ordered himself a $300 bottle on company budget! Not to mention this other company that planted brand new flowers every month! Where is the money coming from for that! If I can cut back, so can they. I don’t own a fancy cell phone, nor do I have cable television, and I’m still alive.

Posted by Edith | Report as abusive

Charlie boy, Did’nt wanna brag about the good stuff. Meet me in Taos in December. I’ll bring my best vintage.

Posted by kelly p | Report as abusive

P.S. Charlie, Find work that you love helping people. Can be profitable and satisfying.

Posted by kelly p | Report as abusive

This is like standing on the beach and watching somebody drown in rough seas. A feeling of complete and utter helplessness. What we all thought were some of the capitalist worlds greatest business executives have proved to be men and women of straw. There are no exceptions. They have thrown up their hands in horror and hope that equally incompetent politicians can save their bacon. This is not going to happen and we are all watching a depression gather momentum.

Posted by anton kleinschmidt | Report as abusive

Kelly P, you’re my hero. Thanks for the post.

Charlie, you’re not. If you want money, you work hard like Kelly. If you don’t want money, that’s fine, but don’t criticize the rest of us. I want money for my kids, and I recognize that I have the freedom to go get it, like Kelly.

Edith, remember that CEOs work very, very hard, and have a LOT of talent. That is a brutal job, make no mistake. He or she must answer to the company’s Board for all such expenses, and the Board represents the share holders. There are budgets for “keeping up appearances,” and I presume that $300 is chump change. The landscaping is probably money well-spent. If you want these perks, study the CEO job and work toward getting it.

I’m not fortunate enough to be a CEO, but I hope to be rich some day. You could, too, I’m guessing.

The economy sucks, and it is going to get worse. It sucks because we forced lenders (Fannie Mae and Freddie Mac) to give loans to deadbeats, then we lifted regulations to get Republicans behind it. Now we are stealing $700 Billion dollars from responsible people like Don, Torrie, Bob, and Kelly (and more!) to bail us out. Fine, but don’t you dare use one of those hard-earned dollars to help a single person that overcharged their credit cards! Let them suffer, they earned it.

And, George, if you want money, go work the 60-hour job. Take two if you need that money to live. Also, go to the library to get books about a better job. Study those books on your breaks. Then, get the better job. Then, take pride in what you did; you will have earned it.

Posted by Dan | Report as abusive

The other unintended consequence to the line decreases are the impact on consumer credit scores. utilization rates will in amny cases unfairly increase resulting in a forced shift on prime credit consumers to subprime. For example a wise credit user may place 1500 of household expenses on credit cards and pay them off each month like I do and have a credit limit of 10,000. The utilization rate of 15% is good for your credit score. I have heard and read stories about people with great credit having their limits decreased to what there average monthly statement is which increases the utilization rate to 100%, very bad for the credit score. I agree in reducing exposure but this will result in tighter credit and a forced transition to subprime markets for good credit consumers.

Posted by Greg | Report as abusive

Thank you Dan. You know, if these folks don’t like rich people, they may want to move to Cuba. There are none there. People should be thankful that someone puts in the sacrifice and effort to provide the best service and/or product for them. Would they do that for no reward? Try Cuba for the answer.

Posted by kelly p | Report as abusive

I love bloggers that call people out and try to diminish their opinion. Pompous. Seesh.

People are not living above their means. Their means has dropped to historic lows. Read the facts and turn of the 24 hour TV news.

No one cares about your 75 hour weeks. I’ve done the same, continue to over achieve, and barely worth it.

The fact is, we are in a world of a mess. Banks, CEOs, regulators, Repub, and Demos are ALL at fault. This is because we as a country have ADD- period. Capitalism as we see it will change. If not soon, eventually. Its not a perfect system. As the saying goes, all societies leave one mark. Sports Stadiums. Then we move on.

P.S. My grammar stinks, so grammar Nazis go browse and leave it alone.

Posted by Matt T. | Report as abusive

It is interesting to see this elevated discussion of the immense problems we are facing degenerate into a squabble about ideology. If this tendency in human human nature plays out here, we get social unrest, even more polarization and a siege mentality by those who have any material security (or think they do).

The invisible elephant in the room is that if we behave like people in past eras when confronted by the collapse of the institutions that have supported the life of the community we move toward hell on earth, kind of like what happened in WWII.

A more rational response would be to adjust the imbalance that has arisen between individualism and community and between materialism and spirituality. If we don’t do the right thing here we consign coming generations to a nightmarish scenario.

Posted by Jonathan Cole | Report as abusive

when I was a little girl, with the other kids, we did play “follow the tail”: if i have 10.00 dollars to invest what I can buy and resale etc.. all accounting in cash no credt card. Credit Card Customer immagination can not go and look to the other side. That is the Bank or lender job to do the diligent calculation. As for axample the “loved ” frequent flyer point offer by the airline.You spend on credit card and you fly free. I am not able to calculate that. After all the airline do not cash the cost of that seat on the plan,economy or business.

Posted by teresa | Report as abusive

Mr. Cole, The resolution these differences is at the root of our problems, not an ideological squabble. Achieving your ideal will require this resolution. What is your more rational suggestion(s)?

Posted by kelly p | Report as abusive

To Kelly,
Hard working ? I seem white collar working 12 hr a day in asia making less than $1000/ month. Not everyone has equal opertunities or luck. I am sure you have work hard for the life you have now. Plesae be happy with, but do’nt lecture. Men ( or women )are create equal ? what a fantasy.
To Dan,
Learn and work hard to be CEO and to be rich ? Don’t forget that CEOs and greedy get what going on today.

Well Kelly, I think comments like “You know, if these folks don’t like rich people, they may want to move to Cuba.” is symptomatic of an unhealthy polarization. We need everyone now to put aside their fears and work together to address this huge societal disruption that we are witnessing.

People who are wealthy and successful are not only diligent, but also fortunate. Many, many diligent people do not become wealthy. With so many people on this planet and with each story necessarily unique, the experience of individuals will span the gamut of possibilities.

During times of prosperity it is easy for the successful to congratulate themselves on their mastery, but it is only in times like this that any mastery really gets tested. So let’s see what we are really made of and turn our attention toward the building of a healthy and prosperous community, by weeding out the corruption, the excesses and yes – the rigid ideology.

Posted by Jonathan Cole | Report as abusive

Mr. Cole, I agree that we face a national test of character. Will we pass? I too hope and believe that we will. There may be some dark periods enroute. Also, the trick to wealth is to know the difference between rich in money and rich in life. We would do well to emphasize “in all thy getting, get understanding”. Thanks for all you do.

Posted by kelly p | Report as abusive

“A more rational response would be to adjust the imbalance that has arisen between individualism and community and between materialism and spirituality.”

Sounds like you would like to spread the wealth? ;-)

Descending into Socialism in dark times would, indeed, be irrational. Letting government “adjust” any imbalance is a dangerously bad idea. Materialism is quite natural, and Socialism is absolutely unnatural. Life contains winners and losers, lions and zebras, Type-A people and Type-B people. Some will win, and some will lose, and it will ALWAYS be that way. Socialism tries to ignore that inescapable fact, and it can’t. Ever. Trying to control capitalism is like trying to control the weather; it doesn’t work, and it annoys everyone who is not in control.

So, which are you, Jonathan? Winner or loser? Lion or zebra? I don’t win every time, but I prefer to think of myself in the winner’s circle.

Taking $200 billion of my money and giving it to people who ran up their credit cards is an act of Socialism. Like all Socialism, it looks kindly, but is actually cruel. This is because we tend to think of the recipients more than the donors. I’m willing to spend the money on only one condition; that it protects the donors to the UTMOST.

I’m also willing to let the car companies and several credit cards fail, so that better car companies and smarter banks can take their places. They are zebras; I’m sorry to see them get torn apart limb from limb, but at least some of us lions will eat better tonight!

Posted by Dan | Report as abusive

The homage to wealth which is being lauded by some is one of the root causes of the present mess. Too many people with very limted skills and poor appreciation of ethical behaviour climbed on the band wagon of rapid growth in world financial markets. They were not clever or admirable. The were in the right place at the right time and while they had their noses in the trough real value was being destroyed without them even being mindful of the impending collapse. That is a pretty fair definition of stupidity.

Dan has a special admiration for CEOs but these are the people who must carry the primary responsibilty for the misery being experienced by so many people all over the world. They misled the public and bamboozled regulators.

I have been a CEO of a small bank and I can find nothing admirable about the behaviour of so many banking executives. Many of them should be behind bars.

Posted by anton kleinschmidt | Report as abusive

Thanks for more evidence that this recession will turn into a depression. Reading about the economy can be compared to the feeling one has while one is having minor surgery while under a local anesthetic. One sees the incision but doesn’t feel the pain of being cut open.

Mr. Kleinschmidt, It has been extremely disappointing to true capitalist and citizens of the republic to see our system corrupted by the largest failure of business and government leadership imaginable. Frat boys run wild. Maybe we get what we deserve. But that does not change the facts. I see your condemnation of capitalism and the pursuit of wealth, but you fail to advise us what system is better? Also, all true wealth has not been destroyed, you just have to know where to look Mr. Banker.

Posted by kelly p | Report as abusive

Good points but the credit card situation should not be a surprise. A monkey could’ve obtained a credit card – which looks a lot like the mortgage mess, and was the whole point so they could then (surprise!) add another digit to that teaser rate, now that you’ve wracked up a healthy balance. Of course, it all goes to personal responsibility. It’s clear, and not missed on the financial/banking markets, that most Americans have none. I have a deep fear and respect for personal debt – which I carry over to my government (fiscal conservative). When push comes to shove; and only a fool would think that life is ALWAYS a big bowl of cherries; I want a large stash of nuts to trade! Those caught in the downpour with no nuts – yesterdays “posers” who blew their nuts and then borrowed others’ nuts; for phones, cars, gadgets, will be tomorrows beggers and vulnerable victims. And here we are back with the call to reason. Does everyone forget? It always comes – you can’t not know – unless you’re under 10. Lesson 1 – save for a rainy day. It’s great for sleeping at night and for trading (bargains)when everyone else is trying to sell the car, phone, gadgets, so they can eat.
PS – to Dan
“…we forced lenders (Fannie Mae and Freddie Mac) to give loans to deadbeats..” Nooooo, they (as many other lenders) saw investors with their hands open and decided to fill it with imaginary things. Who is we and how were they “forced”? I spell greed.
“…then we lifted regulations to get Republicans behind it…” uh, again who’s “we”? Republicans lifted the regulations when they were in control of Congress.
“…Now we are stealing $700 Billion dollars to bail us out…but don’t you dare use one of those hard-earned dollars to help a single person that overcharged their credit cards! Let them suffer, they earned it.” Nice logic. It’s fine to shovel greedy lenders some hard earned billions-actually only $350B so far; which was “alleged” to go towards loosening up credit so people (with real credit) could buy cars and stuff to help get the economy moving again. Which of course now has been decided it’s probably better if they just “sit on it” (ie let the interest grow-imagine even 1% interest on $350B!!) and send Paulson out for more. But you don’t want to help lower predatory interest rates to plain folks (you can imagine double digit interest on even $350!) who may have just lost their job, have a choice between paying the mortgage or their bloated (double digit interest rate) credit card? Not sure I follow….
Thanks.

Posted by Carol | Report as abusive

To the complaints about people having credit card debt – it is sad that many people had to use their credit cards to buy food and medications or education expenses in order to survive – until they could find another job. This is because Wages have steadily Decreased but living expenses have Increased.

Where is the outrage that the Banks and Financial Institutions that got a bailout – used their Credit very dangerously to gamble on CDOs.

Its not the mortgages that tanked the financial industry – it was a Rule change by the SEC in 2004 (requested by Hank Paulson) – the rule change allowed Banks and Fins to Leverage their debt to reserves from 1:12 to 1:40 – so they borrowed 40 X their worth – to gamble on CDOs. They lost their gamble – after making $500 million (Paulson) – and now the taxpayers give them a free ride with no consequences.

Consumers deserve a break here – All Consumer lending should be extended, not lowered with interest rates at 3% so people can pay down their debt – after all the debt is now owned by taxpayers, not the banks. Otherwise it just means that the Banks get to gouge the consumer twice.

Posted by ap | Report as abusive

The root causes of bubbles and depressions are arrogance and greed, and thus the prevention would be for people to willingly share what they have, live modestly, invest rationally in beneficial enterprises, pay people fairly and appreciate the work of others(whether that be a burger-flipper or a CEO) as something that is valuable. Although there are individuals who choose to live this way, society as a whole will not willingly do it and these values have become anti-patriotic in the last couple of decades, replaced with the mantra of “it’s the economy, stupid” (and look where that focus has gotten us!)

Thus the series of bubbles (including the latest: government bailouts) will be followed by correcting forces that no one can manage, control or contain. No one has come up with a fix because there isn’t one that will preserve the status quo.

Maybe for a short time during and/or after the shocks and changes forced upon our culture, people like kelly p will realize that if it weren’t for all the diligent, hard work of people who do not have the skills to be a CEO, he wouldn’t have anything to boast about. There are plenty of people who have worked just as hard building bridges, defending the country, cooking and serving food, producing useful things, growing food–all for the benefit of kelly p but obviously without much appreciation from him.

And to be fair, I also know that many front-line workers have no clue about the difficulties and responsibilites faced by management. They often have a profound lack of appreciation for the fact that the efforts of investors, planners, taxpayers, teachers and administrators have provided them with work and income and a bountiful provision of goods and services.

My solution: cultivate appreciation, humility and love for others, and be prepared to weather a depression.

Posted by Adele | Report as abusive

Ms Adele, I am glad you have appreciation for the occupations that you listed. I have toiled at three of them for a goodly period of time.

Posted by kelly p | Report as abusive

One other point worth considering. You can see that many people who want to stick with their ideologies say down with capitalism or down with socialism or some other “ism”. I suggest that it is the corruption of the system and not the system itself that causes a societal failure.

In business school, it was taught that when managers do not take into account the health of the communities of which they are a part, it is mismanagement. Capitalism, or free enterprise market economies also must be true to their own philosophies and stated purposes. If you kill the goose that lays the golden egg, you are a pirate, not a capitalist and as such you should be identified and relieved of your authority.

Posted by Jonathan Cole | Report as abusive

“My solution: cultivate appreciation, humility and love for others, and be prepared to weather a depression.”

Agreed. The key word here, though, is “cultivate,” NOT “legislate.” Taking your hard-earned tax money amounts to legislation.

I also agree that many CEOs are crooks. I’ll bet you a paycheck that the percentage of crooked CEOs is exactly the same as the percentage of crooked teachers, doctors, nurses, and/or machinists. I’m no fan of any crooks. My only assertion is that it is natural for CEOs to exist, and they have earned a certain amount of admiration for reaching that level in life. They forfeit all such admiration as soon as they break the law or prove themselves incompetant.

Posted by Dan | Report as abusive

Problem is our current economic woes are not about class warfare or envy, they are about failure of common sense, lack of loyalty to one’s nation and its people, using lobbyists, insiders, power brokers, and the IRON TRIANGLE that exists between Washington, Wall Street, the Davos culture of disconnected global finance, failure of the rule of law, failure of ethics, logic, and imagination by economic and political leaders. So what do the powers that be do in response to an ecnoomic and financial meltdownm, they place the entire system and strategy in the hands of the same people, or those with similar dogmas or strategies or ‘answers’ that created problems so immense little will be advanced to solve any of them…we will get more of the same instead. The problems go back to the end of World War II, but Nixon being forced to take the US off the gold standard in 1971 didn’t help. Regardless of intermittent bubbles, booms, and busts, the real unraveling of the US economy began in 1980 when Jimmy Carter and Paul Volcker unleashed the ‘monetary deregulation act,’ this allowed a complete change over of the US economy from producer and creditor to consumer and debtor, not to mention allowing our money to become funny, central banks like Goldman and JP Morgan, Lehman et al to have way too much power to control government, monetary policy, as they financialized the entire system calling it ‘globalization.’ Problem is … the other globalizers were watching out for NUMBER ONE .. their own nations, economies, people..with the exception of the UK, France, Italy, the Swiss, Germans, Japanese did not deindustrialize, nor did they turn banks into an adjunct of Las Vegan casinos as they have become over these past 30 odd years of blind dogma, lack of common sense, and rationalizing a race to the bottom for the American working class not with Europe but with the THIRD WORLD. As it is, Japanese workers, European workers make more money hourly and have more benefits and time off than American workers in the same or similiar skill sets. Yet you are never ever told that by any of the money honeys on CNBC or Fox or Bloomberg…although Bloomberg is more honest than the rest and more capable of analysis. The great unraveling taking place the immense deleveraging of the american disaster financial capitalism will take the better part of a decade. Until we start weening ourselves from credit, unless a lot of that debt is forgiven, unless we start making stuff so we don’t have a nearly trillion dollar trade deficit we will continue to spiral downward as the money honeys ask plaintively when are consumers going to spend, when is the housing market going to save us, when can we announce that like the Titanic, ‘not even GOD can sink us.’ Well, as they play “nearer my God to thee” the GREAT ship of state is taking on water and will continue to do so until both government in the US and business, AND financial capital start telling the truth and being realistic about how things STILL work in the real world. We can not remain a great nation unless we are making stuff no matter how much Larry Kudlow says the financials will keep our economy above every other nation. Wonder if the Capt. of the Titanic was saying something similar as the big ship went down 6 miles to the bottom of the Atlantic.

Posted by Diane | Report as abusive

Any opinions about the role of federal, state and local borrowing and spending in all of this?

Posted by kelly p | Report as abusive

Hen yeah kelly p! Those evil, greedy capitalist could not even borrow and spend as fast as those sacred government officals.

Posted by kelly p | Report as abusive

I have never owned a car, television or credit card,
but own multiple real estate properties and am happy married.
I was poor when I was 21 years old, am now a millionaire at 41.
I spent years working my way up into a great job,
earned all my money through sheer hard work and dedicated saving.
My opinion, let the credit sponges shrivel!
Pump those billion dollar bail-outs into a sound investment
for the future of the US, public education and social health care.

Posted by Martin | Report as abusive

It is true that many middle income Americans have used their credit cards irresponsibly for expensive indulgences. It is also true that CEOs have been reimbursed to a gluttonous level. I am not one to quote the Bible but the saying “the love of money is the root of all evil” sure rings true here and now.

HOWEVER, it is also true that Americans have been driven to use their credit cards because, even when they are working, they cannot afford necessary expenses. I looked at my credit card charges for the past few years. Most of it was car and home (roof) repairs, dental work, college tuition for my kids and also books.

We need to raise the minimum wage so people could take an interim job if they get laid off and actually survive on it. I am appalled that you suggest people should take on more debt because they are unemployed and need a life-line.

A government is supposed to protect its citizens. The government should pay enough unemployment so that people could survive if they loose their job, that is what unemployment insurance is for! We need to cover medical insurance, period! and if we want to invest in our future we should subsidize education also.

We need laws that protect people, like realistic minimum wage law. We are better off spending our money on government programs to assist ALL Americans in getting the bare necessities. This is not socialism, it is just common sense.

Our businesses cannot compete globally with other country’s businesses, that are not responsible for health care. We cannot be on the cutting-edge of technology unless we have more accessibility to higher education.

Give the bailout money back to the American people, not to credit card companies!

Posted by Karen from Brooklyn | Report as abusive

Why do these news writers constantly refer to the Federal Reserve Corporation as “The Fed”? It seems that they want to perpetuate the myth that has permeated American society that the Federal Reserve System is a part of the government. Actually, the Federal Reserve System is a private, run for profit, private bank that was responsible for creating the first economic depression in the 1930s. The global elitists that own the Federal Reserve System loan paper dollars to the US government at interest. A large portion of US debt is a result of this interest even though the US Constitution explicitly gives the power of coining money to the US Congress. The 13th Amendment was never properly ratified and is a scam. The Federal Reserve Corporation should be eliminated before its owners are allowed to implode the economy through money manipulation. After imploding the economy, the owners of “The Fed” will buy everything up and sink the dollar in a wave of inflation. These people also own the corporate media and make sure you are never aware that the Federal Reserve is no more federal than Federal Express.

Posted by Jay | Report as abusive

The global economy functions on credit, and that will not change. The “match” that set the blaze was 500 billion dollars loaned to those who were not credit worthy. Fannie Mae and Freddy Mac got really loose with credit worthy policy beginning in 1999, so just a few years, and the credit market is now in shambles. It would be wise for our society to return to the lending policies of thirty years ago when a borrower had to show the ability to repay any type of credit line.

The abusers of the credit economy have made the situation difficult or those who have used credit wisely. I just hope that the credit worthy people can go about their business and lives again.

Posted by Daniel | Report as abusive

Tightening credit will have the effect of bringing the economy back into line with reality and ultimately this is necessary. Since 1981, the US government and the American people have functioned in the delirious fantasy that debt doesn’t matter. We have lived a false quality of life for decades. Only for a few years of the Clinton administration was fiscal responsibility given anything more than lip service. America’s debts outweigh its actual assets and this is unsupportable. Like all lies, the truth eventually comes out. The economic crunch is a bitter medicine that must be swallowed, the underlying disease must be treated, and we will be stronger for it in the long run. Fail to learn the lesson now, and we set ourselves up for a yet bigger catastrophe in the next few years.

Posted by Cunamara | Report as abusive

In a true crisis of capitalism, there are still people who attack socialism as the cause. Socialism, like any human system, brings its own problems, but massive credit card debt and polarization of wealth are not among them. People in the industrialized world are locked into a system of endless consumption that, for now, seems to have outrun its ability to finance that consumption. It’s time to cut back.

Posted by Alec | Report as abusive

Yes, we over-consume, and unwisely use credit to do it. And yes, I think we should cut back on consumption fueled by credit. But think for a moment who we buy from? China, India, Indonesia and just about any “third world” country you can name, people only recently getting out of the dark ages of economic security. If we stop buying their goods, who wins and who loses? We could probbly live comfortably (in relative terms) for years on the junk we have in our garages, but they have no garages.

When the Soviet Union collapsed it was because to speak in Clausewitz terms the will to defend it was broken. The world has been conquered by a system of mass consumption, immediate satisfaction , wherein consumers were paid salaries, and received loans on the explicit condition to use these to acquire goods, which in terms of quality and customer satisfaction continued to decline.After spreading this American dream around the world for 50 years, and in its wake destructing traditional values like religion, family, and social consensus, it looks like it has run its course and is called to join other museum pieces like the remains of the Soviet Union.

Posted by John Van der Hoeven | Report as abusive

Asian countries are more conservative and depened more on savings than credit. The fact that American economy is more consumer driven and where savings does not exist, this was bound to happen. American economy runs only in figures without proper facts.To add to our woes, more developing countries like India and China are following American way of life. With wrong economy policies likes loans disbursed without proper colletral security, this was bound to happen. Americans are not only drowning, they are taking entire world with them.

Posted by harry | Report as abusive

There’s a lot of complicated information here about what caused ‘the problem’ and how to fix it. I would like to suggest that the more simple explanations hold the most truth and perhaps a glimpse of the solution. We need to be vigilant and root out greed. We must have the tools to do so. Our government must step up to the plate and provide these. Private industry will not. We’ve known that since forever but somehow get hoodwinked into believing that ‘self regulation’ works. We need to be prudent ourselves, not borrowing for consumption but borrowing for investment. How many times have you heard something like the following: “this car will be the best investment you’ll ever make”?. I’m sorry to say, but you can replace the word “car” with a large number of consumable products. I guess, this means that I’m suggesting that our society needs to learn the lesson that there’s a serious difference between consumption and investment and borrowing for consumption is not prudent. Sad, but it looks like we’re learning the hard way. We’ll also learn that “The Fix” will look like a welfare state before we’re done here. I expect that on the way, we’ll also learn to be a little more compassionate, prudent, contrite but especially more humble as we hear the world echo: “Welcome to the United Socialist States of America”. Get used to it. It’s going to take a while and we’ll all have a hand in helping our neighbor and removing the wealth from those who don’t need it in so far as they aren’t investing it in the kinds of things needed to grow a healthy, vibrant society. We’ll first need to start with a law that does not permit them to move the wealth offshore, followed by a law that puts a large tax on inheritance. I know that this sounds drastic. Have a look at the western democracies that have had to do this and where they are today — among the world’s richest nations. Go figure.

Posted by Randy | Report as abusive

I believe that the problems facing the US are all derivatives of deficit spending by the US government. If you do not have money you cannot spend money. The pie does not increase to support the wishes of congress and the senate. This philosophy of deficit spending has now plagued the US citizens. How can you possibly teach fiscal responsibility to your population if your entire economy is based on people buying things they don’t need with money they don’t have?

Posted by marc c | Report as abusive

Mr. Randy, You are gonna get a big suprise when you see the effect of “removing the wealth from those who don’t need it”. Just let them try.

Posted by kelly p | Report as abusive

One way the credit card companies can save money is stop sending out so many credit card offers. I already have a card with Citi and I get an over at least once a week to sign up for the American Airlines Citi Card. If they cut back on sending out those offers it would save money and help cut down on trash.

Posted by Jason | Report as abusive

Note to Kelly: too true. Let them try. Capital flight is unmanageable at the best of times. I’m not beating any particular drum though, nor do I believe generally that tax is a good economic tool. I do believe though that there is too much capital in too few hands and this has to change. Just pointing out that other (free market, democratic) countries have in the past had no choice but to tax to unlock some of the wealth that sits in too few hands and is unproductive. And that this is how it would probably play out. For better or worse. Of course an alternative would be to voluntarily share. Like Gates and Buffett for example.

Posted by Randy | Report as abusive

It looks like the credit card companies are doing a better job of risk analysis. In a recession wage increases will be limited and job loses will increase. The ability to sell or mortgage property to cover debts will become more difficult. The reduction of credit to those that may have a difficult time paying is both prudent and fair. If the home mortgage industry had been more prudent this recession would be less severe.

Posted by John | Report as abusive

Several comments in response to other comments and the article. The majority of the current financial mess started with the mandate of the Federal government to lending institutions to offer subprime loans. The lenders turned around to unload these high risk loans and the only vehicle that was palatable to the market was selling them as part of a package with blended risk. When the inevitable bubble in the housing market came, the effects were magnified by these packages that included subprime loans.

The point is that the failure of the financial market came from one horrible government program – not from a general over leveraging by the American consumer.

If you want an economy that has full employment – which we have enjoyed now for several decades – then you must have consumers buying to support industry. There really is no other option unless one settles for higher unemployment as the norm.

Posted by Guy Thompto | Report as abusive

“The U.S. Federal Reserve last week added more nutrition to its alphabet soup of rescue programs when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend up to $200 billion to investors in securities backed by credit-card, auto and student loans.”

The above paragraph summed up for me the root cause of the problem and the solution. The government is bailing out the investors and the banks but doing nothing for the average consumer (taxpayer). $200 Billion in tax cuts to the American public to pay off credit cards or to spend in the economy (if someone is already using credit wisely) would go long way to both remedy the problems of the banks and the economy. If 70% of the economy is driven by consumer spending then anything that puts money back in the hands of the consumer is going to help it recover quicker than bailing out the producers (banks, car companies….etc). Thank God both Obama and McCain supported tax cuts for the middle class in the election. This one measure alone will do more than anything that Paulson and Co. has thought of yet. By the way, someone suggested a few weeks ago giving out (by lottery) 1 Million $25,000 vouchers to Americans willing to drive an american car from the big three. This would take 1 Million vehicles off of the lots and keep the factories producing replenishment vehicles until the credit market gets back to normal. The auto bailout would help both the consumers and the producers. Better in my opinion than trying to manage a $25 Billion investment in the big three out of Washington by reviewing business plans. I wish someone in Washington would paraphrase Bill Clinton from his first election “It’s the consumer stupid…”

Posted by Joe S. | Report as abusive

Capitalism, or free enterprise market economies also must be true to their own philosophies and stated purposes. If you kill the goose that lays the golden egg, you are a pirate, not a capitalist and as such you should be identified and relieved of your authority.

Posted by Peggy | Report as abusive

As a banker in the ’80s, I was leery of the deregulation that allowed interstate banking. That is the cause of the “loss of community values”. Banks were allowed to operate using the most advantageous laws like having a bank in a state with no usuary laws. That allowed them to charge whatever they wanted with no limit. We should reinstate the usury rate at 18% as a national high. We should treat the banks as a monopoly and do away with the interstate banking laws. Making the banks have only community employees and autonomy to operate as the community dictates. It is difficult to cheat your neighbor the parent of the kid your kid plays ball with, or across the bridge table. When you interact with your customers everyday in real life terms, you take better care of their money.

Posted by Peggy | Report as abusive

Guy Thompto: “The majority of the current financial mess started with the mandate of the Federal government to lending institutions to offer subprime loans. ”

NOT TRUE – 80% of Subprime mortgage loans were by PRIVATE lenders like Countrywide and American Home Mtg and Argent. Private lenders are NOT Regulated by the Federal Reserve and DID NOT HAVE TO COMPLY with the CRA (Community Reinvestment Act). Therefore Provate Lenders were NOT FORCED to write Subprime loans – they were encouraged to by firms like Goldman Sachs. These Private Lenders were financed by Goldman Sachs and Lehman Brothers, etc.
http://www.slate.com/id/2201641/

Wall Street gambled Mortgage Backed Securities in Derivatives at 40 X their reserves (see SEC Rule Change in 2004 requested by Goldman’s Hank Paulson). They lost their gamble, don’t have 40 X their reserves to pay – and the Taxpayer is being scammed big time.

Posted by ap | Report as abusive

Thanks for an excellent post Ms. Peggy. Also, government pressure and requirements that banks make affordable loans available (“everyone deserves a home, car, credit car, education” etc. – whether they can pay it back or not) caused banks to stop keeping loans in house because they knew that they would not be repaid. Instead, they took their fees, sold them to Wall Street, had their friends down the hall at the rating agencies rate them AAA, took their fees, sold them to pension funds, foreigners, mutual funds etc. The builders, realtors, attorneys, appraisers, retailers, politicians – everybody – was making money without regard to the ultimate outcome. We do not have any great leaders now, so there were no adults around to stop it. Oh well. Very predictable if you have knowledge of history and human nature.

Posted by kelly p | Report as abusive

Debt of all forms is now so massive in the US that there are only two ways to deal with it:

1). A full-fledged bankruptcy by the United States of America, in which the nation, all the states, all the municipalities, many of the businesses, and most of the people go bankrupt en masse.

I have no idea what the side effects of that would be, probably the end of human civilization.

2). A massive money-printing binge by the government, enough to devalue the dollar by about 50%. One consequence of that would be that all debt would be downscaled by 50%, which would probably get it to a manageable level.

In scenario 2, we are talking about a 50% devaluation of the dollar, so we are talking about a 100% inflation over a short period of time.

This would be good for debtors (debt reduced in half), and creditors too (they would salvage 50%, instead of losing 100% when debtors all default)

Wages and pension payments would be doubled (they would now be paid in “hollars” rather than “dollars”, one “hollar” being worth half of the old dollar.

Those with cash & bond investments would lose 50%. That’s fair enough, they were the ones that got spared in the 2008 massacre, they can certainly afford a 50% haircut like the rest of us.

Posted by lance sjogren | Report as abusive

Guy Thompto, which federal mandate requires lending institutions to make subprime loans? If you’re referring to the Community Reinvestment Act (CRA), your information is incorrect. It does not require any such thing. The CRA was enacted in the 1970’s, and can hardly be blamed for the current economic situation. The CRA was enacted for the very necessary purpose of preventing lenders from “redlining”–a common and unfair practice in which depository institutions opened branches and accepted deposits in certain ethnic and lower socioeconomic communities while refusing to lend to those same depositors–effectively using these depositor’s money to make loans to predominately middle-class and affluent Caucasian borrowers. The CRA does not require institutions to make loans to non-creditworthy borrowers. Even still, the current mortgage crisis cannot be blamed on subprime borrowers, but on greedy bankers who capitalized on a convoluted and ill-constructed secondary market scheme that they believed lowered their risk of making haphazard loans far in excess of what borrowers could afford—both prime and subprime borrowers—and without regard for the real sustainability of such practices. If the CRA were to blame, the current mortgage crisis would have surfaced much sooner.

Posted by Corey | Report as abusive

Perhaps it’s about time the consumer learns a bit about economics. Excess debt always has its risk and debt is not necessarily required to drive an economy.
For instance the German economy has been one the strongest in all of the world while its consumer debt has been one of the least.
I personally have had ZERO debt throughout my 68 years, although have to show by a long shot more than most Americans, therefore I cannot be convinced that it requires debt for consumer purchases to flourish; While we should not compare personal debt with corporate debt.

For the US consumer to ween himself off the debtor status will be painful for process for years to come, but it’s not a death sentence, we will become stronger when the healing process has ended. It’s also about time the government (on both local, state & federal level) to learn that there is no such word as “infinity” in debt.

Posted by ddavid | Report as abusive

Guy Thompto: “The majority of the current financial mess started with the mandate of the Federal government to lending institutions to offer subprime loans. ”

YES THAT IS TRUE !! It also holds true for “private institutions” as it becomes an indirect forced consequence to follow the market to stay competitive. We, the shareholders not only require but “expect” that of our investments. [The greed of instant earnings instead of long-term results]. Therefore, the shareholder becomes very much part of the picture.

Posted by ddavid | Report as abusive

By banks cutting credit cards,is great, they are taking away there own rights to rip off the american people, with 20% interest and all kinds of hidden charges, I am glad they are suffering, it serves them right!