— 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.
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.
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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)?
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.
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.
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.
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.
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.
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.
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.
P.S. Charlie, Find work that you love helping people. Can be profitable and satisfying.
Charlie boy, Did’nt wanna brag about the good stuff. Meet me in Taos in December. I’ll bring my best vintage.
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.
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
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…..
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.
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.
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.
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.
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.
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.
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.