January 06, 2009
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News: CC Industry's Rub.
The eventual rubs will manifest the severity level over time, as the lending credit card institutions come to grips with losing their primary control of risk. Similar to the (now defunct) AT&T behemoth of old, the huge credit card industry was able to offer much ‘sweeter deals' to the general public by exercising broad rate hikes to minimize individual high-risk cases that would flare up (kind of like an insurance company). The government regulations are set to take away the credit card industry's power to do that any longer.
The industry is advising the government "Whoa! Think about the possible consequence. Do you really want to price millions of consumers out of the credit card market?". How much do we trust the powers of the open market to fix our problems? How much would the 45% projected cutback in credit card availability effect consumer confidence? Industry projects an availability reduction figure of $2 trillion of credit that consumers would lose.
Prominent banking analyst, Meredith Whitney informs us that, about 70% of US households currently use credit cards. From those 70%, 90% of these households do rely on those cards, in lieu of using cash. The cards provide the liquidity flow so our nation can still buy and sell. The liquidity is critical at a time when job losses keep increasing at a loss-rate of over 50% each year. If retail is blindsided by a liquidity drought, this problem will exacerbate. Economically, the liquidity loss would have the effect of a nationwide ‘pay cut' in consumers' ability to buy. In addition, as many as 45 million American consumers could lose their accounts and not be able to get new ones.
We could either struggle for a much longer time than necessary or we could evolve into a different kind of consumer nation where our spending is much more subdued. Ease of liquidity follows the natural law of ‘following the path of least resistance'. The ease of liquidity that credit cards provide will determine the natural evolution of our consumer society.