March 10, 2009
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News: Whitney Woes of Credit Card Crunch.
Meredith Whitney, prominent banking analyst, is warning of an imminent credit card crunch soon that may stifle our economy with greatly-reduced consumer spending. As she wrote in the Wall Street Journal, credit cards provide the liquidity to keep our economy going (or get it started again). Of course, we must weigh in the effects of unprecedented defaults, as well. So, her message is that we mustn't limit the availability of credit cards from those who are responsible: Do pay on time and; Don't become buried in debt.
She's probably right when reporting that credit card limits have already been cut by $500 billion, just in the last quarter of 2008. This, of course, was the time of the initial shock when we realized just how bad things were. The first targets, however, were those either deemed to be at higher risk or simply not using their credit cards for over two years. Of course, when dealing with millions of accounts all at once, there were unfortunate situations where the ‘wrong people' were cut.
Ms. Whitney seems to believe that this ‘initial shock' measure will continue in a ‘straight line' and continue whacking off $500 billion more in credit lines for the next four quarters (like never lifting your foot off the accelerator after starting up from a stoplight). By the end of 2010, she does concede the condition will slack to only whacking off $700 billion per year. Scary stuff.
She contends that this velocity of credit loss (about $229 million per hour) will continue. If it does, it could wipe out our economy. Let's hope someone takes notice before we hit the wall. What's interesting here is the inflexion of the plummeting stock values of the credit card lenders on Wall Street. For the first time since the crash, they're earning some confidence and may even show a profit. Is that too much to ask. Once they become viable again, maybe they'll lighten up on these credit line cuts. After all, writing off 9% of $5 trillion ($450 billion) could get expensive.
Say, the industry was to continue at that same velocity for 2 years (reducing our credit by $4 trillion). It's interesting to note that our credit card consumers could still charge another $200 billion above what they already have. Still, we'd better keep an eye on it, just in case.