Credit Card Offerings To Be Cut in Half?
Good news or bad news?
The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.
The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.
“In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent.”
I guess this means the days of easy money are over. I would think that in the long run if the banks hold to this it will be for the best. However the loss of liquidity in the near future means some painful adjustment for the US consumer and the industries that have been built up to cater to them.
During this crisis it seems that trillions of dollars have simply evaporated. The international finance companies were creating money out of thin air by buying appreciating assets and then borrowing against those assets. Now that the underlying asset values have dropped away the money supply must have contracted as well. It makes me think that perhaps the central banks’ interventions may be more necessary than we think when it comes to staving off deflation (which would be very bad.)
Back to the credit card companies.
When a person looks at the interest rates that credit card companies charge as well as the various penalties and fees you have to wonder how these guys couldn’t make it. One has to think that they must have been giving a card to everyone. Even in my case does it make sense for them to extend me enough credit for me to buy a nice car with my credit card?
I don’t understand that business model. After all with the credit reporting systems that they have it should be pretty easy to tell just who is going to pay off their accounts and who isn’t. Perhaps these card companies were happy to have people run up balances to charge interest on. The reality of whether or not the balances would ever be paid off was secondary to the paper profits that they were able to show on their books.
