— 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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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.
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.
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!
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.
Hen yeah kelly p! Those evil, greedy capitalist could not even borrow and spend as fast as those sacred government officals.
Any opinions about the role of federal, state and local borrowing and spending in all of this?
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.
“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.
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.
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.
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.
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.
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.
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.
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.
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.
“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!
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.
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.
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.