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The Wrong Decline In Credit Availability
Lots of people and small businesses is the U.S. depend on credit cards for short term finance.
That ability is to end says Meredith Whitney, one of the analysts that saw the crisis coming:
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."
A possible solution is re-localizing credit. Whitney writes in the Financial Times:
First, re-regionalise lending. Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.
The Fed is pours lots of money into the big bank bucket in the hope that the bucket will overflow and liquidity will trickle down to where it needs to be. But the big bucket turns out to be bottomless as the big banks use all that money to repair their balance sheets. The Fed should instead help the smaller banks directly. Together with the treasury it could also guarantee small business loans. Instead of buying bonds backed by credit card debt, it could guarantee revolving consumer debt directly.
Why push the money through the fictional economy of the big bank system when it is clearly broken. Instead route the money around to keep the real economy going. There are still local banks that could implement programs that go directly to small businesses and consumers.
One might say people should depend less on credit. That is a fine goal and I agree with it.
But there is a difference between getting there in one big slump or through a gradual decline in credit availability. The big slump will inevitably overshoot and the economy will reach a too low credit level. This will hurt people and businesses who are creditworthy and will unnecessarily lead to a further decline in the real economy.
The latest Welchian stress-inducer making the watercooler rounds is, “Aim for where the puck is going to be, not where it’s been,” or some such Straussian tautology.
That’s fine, as long as the mentor understands the mentee’s stick was built in 1985 and has seen a -35% devaluation to where no refi credit is available to refurbish, the mentee’s skates rolled off the factory floor in 1998 and have 150,000 miles on them, and those prayer beads on the mirror are for just one more day without a breakdown. The poor skater is lost in a gynormous stadium where the lights are flickering towards darkness, the ice is melting, pitted and graveled, the puck is rebounding past at 186,000 miles per second, and really, the only hope the poor investor has left, is to position themselves somewhere in the center of the hall, waiting for the puck to find them, hopefully from in front so they’ll see it coming in time to place their bets, and not impact right up the ass on a margin short call,
because his wife is working the street, his children are all indentured servants, and the stadium caretaker lives on the welfare tax dole and couldn’t care less.
“Ah! governments were governments, and judges were judges, in my day, Mr. Hinkley. There was no nonsense then. Any of your seditious complainings, and we were ready with the military on the shortest notice. Then, the judges were full of dignity and firmness, and knew how to administer the law. There is only one judge who knows how to do his duty, now. He tried that revolutionary female the other day, who, though she was in full work (making shirts at three-halfpence a piece), had no pride in her country, but treasonably took it in her head, in the distraction of having been robbed of her easy earnings, to attempt to drown herself and her young child; and the glorious man went out of his way, sir–out of his way–to call her up for instant sentence of Death; and to tell her she had no hope of mercy in this world.
He won`t be supported, sir, I know he won`t; but it is worth remembering that his words were carried into every manufacturing town of this kingdom, and read aloud to crowds in every political parlour, beer-shop, news-room, and secret or open place of assembly, frequented by the discontented working-men; and that no milk-and-water weakness on the part of the executive can ever blot them out.
Great things like that, are caught up, and stored up, in these times, and are not forgotten, Mr. Hinckley. The public at large (especially those who wish for peace and conciliation) are universally obliged to him. But even he won`t save the Constitution, sir: it is mauled beyond the power of preservation.”
Posted by: Yellow Tiber | Dec 3 2008 6:04 utc | 16
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