Monday, December 1, 2008

$2 Trillion In Consumer Credit Lines Could Be Cut, Spelling Disaster

cutting credit cardsIt is no secret that the U.S. economy runs on credit, and has for some time. When credit flowed freely, our economy boomed. When credit became restricted, our economy started crumbling and turned into what we see today. As we attempt to rebuild our beleaguered economy the last thing we need is a cut in available consumer credit. But according to at least one analyst we could soon be faced with that reality. Prominent banking analyst Meredith Whitney was quoted by Reuters as projecting consumer credit to be cut by as much as $2 trillion over the next 18 months.

To make matters worse, the outlook for the job market isn’t looking any better. People are losing jobs right and left, and now they could be faced with cuts to their credit lines as well. From the bank’s perspective, it makes sense to cut credit lines now. With people racking up record debts, and some having no means to repay them, the risks are extremely high. The responsible thing for banks to do is to cut credit lines for those consumers who show any signs of causing trouble down the road.

From an economic view, though, we need to boost spending any way we can. Consumer spending makes up the largest portion of economy and consumer spending must improve before the economy can rebound. The fact that jobs are being lost and credit lines cut means that consumer spending will be likely to tank. When that happens business will suffer, leading to more layoffs and an even bigger hit to consumer spending. I think you can see the vicious cycle that is being formed here.

You can bet that Obama and the new administration will do whatever they can to jump start spending. This would include the stimulus package that is being considered, as well as placing added pressure on banks to increase lending.

1 comment:

Anonymous said...

While I appreciate your position I must disagree. An economy based on credit, can only be successful so long as all parties involved use their credit responsibly. Unfortunately and recently, no one has been responsible in the lending or using of credit.
And beyond that, credit by its nature has a limited window. It can not go on indefinitely, it must be repayed. We're looking at the irresponsible credit bubble bursting.

The reponsible thing for banks to do, should have been done years ago: Lend credit at fair rates to those who could repay it. Not offer credit cards to students with no income, or mortgages to individuals who could never hope to pay them back.