December 19, 2008
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News: Will Consumer Liquidity Suffer from New Regs?
We've heard from both sides concerning pros and cons of the new credit card regulations. Who do we believe? The analysts have something to say about it. On the one side, we look to benefit from greater credit card consumer protections. But, on the other side, we're warned about losing spending ability. One of the prominent banking analysts, Meredith Whitney, sides with the banks. She warns of consequences where the bad outweighs the good. She rightly explains that consumer liquidity is essential to the extreme economic crisis we are now going through. If consumers can't spend, our economy cannot recover. Since the jobs are gone (lost another million this year), the liquidity is starving from lack of pay (even from those employed with greatly-reduced pay). The second-level medium of liquidity comes from credit cards. Ms. Whitney argues that, if this medium goes away, our nation may be thrust into much deeper trouble than we're already in.
That consequence Ms. Whitney warns us about is the likelihood of the "commensurate amount of harm to the economy by stifling consumer spending." What she's referring to, of course, is that the credit card industry will reduce the credit they offer to the community if these new regulations restrict it from adequate risk protections. How much do we depend on credit cards? Ms. Whitney informs us that 70% of our households use credit cards. Of those 70%, 90% of them households rely on credit cards, in lieu of cash. Credit cards provide the liquidity flow. Ms. Whitney summarizes with: "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." With these changes, credit card liquidity is expected to decline by 45%. She warns that, beyond credit cards, all consumer loans will be affected also.
The key ‘rub points' are these: 1) prohibiting easy implementation of rate hikes on the fly and for the industry's own reasons and; 2) providing the industry time to adjust for increasing risk when a credit card holder misses a payment. These new regs are not slated to be enforced until July of 2010, so we'll have a lot of time to banter about cause and effect before the fires start.