Credit Card Industry May Cut $2 Trillion of Lines: Get Ready for Famine
December 1st, 2008Famine? The Reuters piece below doesn’t say anything about famine. It includes the words dangerous and unprecedented, but not famine.
So, how might we conclude that widespread hunger will result from a reduction in credit lines?
Because increasing numbers of people are relying on credit cards to pay for their BigMacs:
Commercial bank exposure via the total amount of credit card loans outstanding has risen more in the last 10 weeks than it did in the previous 10 months cobined. Moreover, the growth in the last 10 weeks — $32.3 billion, or roughly $600 million per shopping day — represents nominal growth of 9.3%, or 48.3% annualized over the last 10 weeks. According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the third quarter, up from 2.5% in 2007, with Bank of America’s rate rising even more steeply – to 5.9% for the period. Moreover, the pool of loans deemed uncollectable rose to a high 6.7% in the third quarter, soaring from 3.6% last September. What consumer spending there is has been fueled in part by credit card: The second-largest merchant-vendor for credit card use is now McDonalds. This suggests that many consumers are in serious distress if they need to get their $4 Big Mac and fries with a credit card.
Via: Reuters:
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 or credit-card lines to decline by 45 percent.”
Bank of America Corp, Citigroup Inc and JPMorgan Chase & Co represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.
A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.
“…We are now beginning to see evidence of broad-based declines in overall consumer liquidity.”
“In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices,” Whitney wrote in a note dated November 30.
She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.
“Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view,” the analyst said.
Research Credit: Pookie
Would you call it famine though? The problem (well, in this case anyway) isnt a shortage of food, rather poverty restricting consumption.
Therefore food riots and theft would be the bigger issues in the short term (until crop yields are hit by fert shortages).
Anyway, I’m off home to guard my tomatoes.
I think it’s misleading to suggest that the majority of people using credit cards for minor purchases like fast food do so because they don’t have enough cash. Many card companies offer points to reward frequent use, so people use them to buy even low-ticket items, in order to earn “mileage.” Not that that justifies anything, but I think if we get a famine, tightening credit lines are not going to be the primary culprit.