Moon of Alabama Brecht quote
December 01, 2008

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.

Posted by b on December 1, 2008 at 18:32 UTC | Permalink

Comments

Rest in peace Tanta the Übernerd. Is there a mortgage market in heaven or hell? Who knowns ....

Posted by: b | Dec 1 2008 18:36 utc | 1

One of the things I never hear discussed is the negative effect massive government borrowing has on credit markets. If the U.S. government has to borrow 7 trillion from debt markets, does that not mean 7 trillion less is available for consumer spending or business loans? Or am I oversimplifying?

Posted by: Lysander | Dec 1 2008 19:08 utc | 2

Also I would add that the 7 trillion is going ultimately to businesses that failed instead of to ventures that might have had some chance of success. That can't be good for the economy.

Posted by: Lysander | Dec 1 2008 19:10 utc | 3

@Lysander - the $7 trillion is mostly only a guarantee so far, not a payout. There is a effect on credit markets through higher government borrowing, but so far it has not had any observable effect.

The real economic effect we see now comes from de-leveraging of private financial entities. According to Keynsian thought in such a situation the government should replace the loss in private demand by government induced demand - on the credit as well as on the goods side of things.

The problem you think of arises when the real economy gets going again - 1 or 2 (or 3?) years from now, and the government keeps borrowing at high pace. Then interest rates will rise for everyone.

Posted by: b | Dec 1 2008 19:25 utc | 4

Can someone explain why a National Bureau of Economic Research would need a year to find that the U.S. economy is in a recession? What is the value of that?

Posted by: b | Dec 1 2008 20:30 utc | 5

@5,

Probably because the BLS and other data collection agencies have been so politically skewed in their operations that current or recent data is worthless.

Posted by: biklett | Dec 1 2008 20:45 utc | 6

Yes, rest in peace, Tanta.

****
Bernhard, the only problem with what you are proposing here is, the people, small businesses, etc. have to forcefully put their needs on the agenda, and so far it isn't happening.

Same thing with the very good London Banker post that you linked to the other day. LB says the West wrongly rushes to save the financial elites while China rightly focuses on the real economy. True, but it needs to be remembered that in China the real economy is personified right now in industrial workers who protest, march, fight the police if they have to, to demand what they are owed. What are their Western counterparts doing to draw the attention of respective governments?

Posted by: Alamet | Dec 1 2008 21:36 utc | 7

This will hurt people and businesses who are creditworthy and will unnecessarily lead to a further decline in the real economy.
I beg to disagree with the "unnecessarily". From an environmentalist point of view, the real economy still needs to take an additional beating way bigger than the one we've already seen, if we want mankind to survive on this planet.

By the way, I've been wondering lately if it wouldn't be best for the government to simply nationalise all the banks, declare that all financial instruments are null and void, proclaim that the government will cover, guarantee and pay for every basic deposit, retirement accounts and the like (basically, the stuff that more or less has a 0 to 2% interest rate), and let all other accounts, bond markets, derivatives, stock market and the like, go down. Every other investment won't be guaranteed, and the government will sort out immediately the wholle mess. It probably means that most of the more complex and riskier savings will just be erased with a puff, but so what, they always knew it was risky, and if they didn't know it, they were just greedy pigs to expect a 7% rate and deserve to be fully cleaned.
Then, once the culling has been done, go back to what B said, banks are here for basic deposits and (mostly local) lending. No fancy stuff, no big money easily and unreasonably made.

Posted by: CluelessJoe | Dec 1 2008 21:54 utc | 8

It's pretty astonishing how clean the small, local banks have kept their noses in all this. Here in rural VA, the branch manager of a small 5-bank chain tells us every week, "we have money to lend- business, consumer, whatever you need- we have it." After the worry caused by having all my business and personal accounts with Wachovia, I may switch; but part of me wonders how long it'll be before they get gobbled up by one of the Big Sloppies?

Posted by: VA Dirt Guy | Dec 2 2008 1:31 utc | 9

Local credit is a good idea, but how many of those who have had their credit card interest rates hiked to 29% are going to qualify for a bank loan? For decades, credit cards have been the source of capital for those with poor credit ratings.

Since most of the credit-card lenders are raising rates across the board, regardless of the payment history of customers, I suspect that this is a last-minute dodge to shed those with the highest unpaid balances. For those "deadbeats" who pay their balance off in full every month, interest rates are of no particular consequence.

My prediction is that the credit-card meltdown that's going to happen in 2009-2010 will dwarf the subprime mortgage damage.

Posted by: Obelix | Dec 2 2008 2:04 utc | 10


Va Dirt Guy, yes I have heard the same from a number of people who bank at smaller, responsible banks. And these repsonsible bankers were not happy with the bailout.. I suppose, the way things are headed, they will be gobbled up by the big banks.

b, why couldn’t local banks issue/process a credit or debit card aside from the big guys? The monopoly by corporations like First Data are mind boggling. With telecommunications as they exist, why is there any need for such “middlemen”?


Posted by: Rick | Dec 2 2008 3:46 utc | 11


Va Dirt Guy, yes I have heard the same from a number of people who bank at smaller, responsible banks. And these repsonsible bankers were not happy with the bailout.. I suppose, the way things are headed, they will all be gobbled up by the big banks.

b, why couldn’t local banks issue/process a credit or debit card aside from the big guys? The monopoly by corporations like First Data are mind boggling. With telecommunications as they exist, why is there any need for such “middlemen”?

Posted by: Rick | Dec 2 2008 3:48 utc | 12

how long it'll be before they get gobbled up by one of the Big Sloppies

Depends on how fast the Big Sloppies can get the money to buy them with, money curtesy of the taxpayers. So pretty fast probably.

Posted by: a swedish kind of death | Dec 2 2008 5:26 utc | 13

Damien Millet and Eric Toussaint sum up Obama's economic appointments, fairly acerbicly. On Lawrence Summers special for you b_real:

Summers went so far as to write in an internal note: The under-populated countries of Africa are largely under-polluted. Their air quality is unnecessarily good compared to Los Angeles or Mexico (...) There needs to be greater migration of pollutant industries towards the least developed countries (...) and greater concern about a factor increasing the risk of prostate cancer in a country where people live long enough to get the disease, than in a country where 200 children per thousand die before the age of five. He even adds, still in 1991: There are no limits on the planet's capacity for absorption likely to hold us back in the foreseeable future. The danger of an apocalypse due to global warming or anything else is non-existent. The idea that the world is heading into the abyss is profoundly wrong. The idea that we should place limits on growth because of natural limitations is a serious error; indeed, the social cost of such an error would be enormous if ever it were to be acted upon. With Summers at the helm productivist capitalism has a bright future ahead.

Just on the "give the bloke a chance" line of thinking, maybe amerikan humanists need to take a leaf outta the rethug playbook here.

If McCain Pallin had got up and begun appointing dems and the left of the rethugs into the cabinet, the human hating god botherers and moneyed baby eaters would be howling in outrage, which is why when a rethug administration blows it there is always some space been cleared even further to the right, ready for the administration to move into.

On the left everyone shuts up when they find they have been burned, I dunno why maybe they think if they do, the asshole who has betrayed them will feel sorry and throw them a bone. Outta loyalty? The guy has just jammed a mack truck full of broken promises up their rear ends and people play to his loyalty? It never happens, worse, when the honeymoon is truly over and the first term prez needs to get some bounce in the polls, the administration moves right because that is where all the noise seems to be coming from.

By having a lot noise further out there demanding more a rethug prez is always made to seem reasonable, compromising for the public good.

When the left all rush to the centre to 'support the prez' it makes the prez's position able to be painted as extreme because there is hardly anyone to the left of him/her.

Posted by: Debs is dead | Dec 2 2008 6:53 utc | 14

Trying to avoid the unavoidable, but at what cost?:

These financial bailouts are ostensibly justified so that the banks will "lend again", except of course that they're not lending, rather they are hoarding the money. Presumably the idea is that, eventually, the banks will have enough money to feel safe enough to start lending. What no one doing the bailing cares to mention is that money provided by taxpayers is shoveled en masse to banks so they can, one day, lend that money back out to taxpayers at interest. This doesn't make sense. Taxpayers pay the government, the government pays the banks, the banks cream off their salaries and perks and bonuses and operating costs and everything else, and then lend back to the taxpayers? Are banks necessary in this scenario or are they merely leeches?

Posted by: b | Dec 2 2008 10:51 utc | 15

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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