As I write this, the S&P500 is up about 3.8% this morning, causing all matter of pundits to declare victory over recession and equity market doldrums. With this as a background, consider Whitney's contentions.
Whitney, who is regarded as a capable and generally accurate sell-side banking analyst, originally forecast credit card loan limit reductions of something like $2T. In her recent Journal piece, she wrote,
"Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010."
This isn't just an isolated event. And it does seem to be a rather under-reported credit contraction story. But Whitney continues by explaining the implication of her forecast,
"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines.
There are several factors that are playing into this swift contraction in credit well beyond the scope of the current credit market disruption. First, the very foundation of credit-card lending over the past 15 years has been misguided. In order to facilitate national expansion and vast pools of consumer loans, lenders became overly reliant on FICO scores that have borne out to be simply unreliable. Further, the bulk of credit lines were extended during a time when unemployment averaged well below 6%. Overly optimistic underwriting standards made more borrowers appear creditworthy. As we return to more realistic underwriting standards, certain borrowers will no longer appear worth the risk, and therefore lines will continue to be pulled from those borrowers."
Clearly, this sort of consumer-lending risk management on the part of card issuers will have a dramatic effect on any economic recovery in the years ahead. According to Whitney, the use of credit card loan availability by US consumers is not uniform. She concludes her piece by noting,
"Over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month. Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. In fact, a relatively small portion of U.S. consumers have actually maxed out their credit cards, and most currently have ample room to spare on their unused credit lines. For example, the industry credit line utilization rate (or percentage of total credit lines outstanding drawn upon) was just 17% at the end of 2008. However, this is in the process of changing dramatically.
Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."
I haven't read or heard of analysis similar to Whitney's elsewhere recently. I suspect it means that governmental economists are going to be seriously blindsided by this aspect of the banking system's reaction to recent events.
Of course, given Washington's actions and reactions over the past twelve months, beginning with the handling of Bear, Stearns' collapse, you can probably count on the following solution to this forecasted dramatic contraction of consumer credit card lending capacity.
Look for the current administration to step into frozen, shrunken consumer installment lending with Fed-issued credit cards.
I understand that, even now, prototypical card designs are being circulated, much like a Capital One card customization package. Available designs from which a Fed credit card holder could choose would include: the current President, Fed Chairman Ben Bernanke, and Treasury Secretary Tim Geithner behind a motif of jail bars.
It wouldn't surprise anyone, would it? A Fed-backed credit card for otherwise-cardless consumers would seem to be the last, logical extension of Federal credit guarantees which began with Bear Stearns, led to AIG, the TARP, GM and Chrysler/Cerebrus bailouts, mortgage forgiveness, cramdowns, and, now, this week, the TALF.
Everyone, it appears, will receive their bailout, including ordinary consumers whose credit lines have been cancelled by prudent private lenders.
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