Credit Card Crunch

Meredith Whitney has a piece in the FT which is full of extremely large numbers:

Capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year…

Expect more broad-based credit contractions but, specifically, more than $2,000bn in credit lines to be cut in reaction to risk aversion, constrained capital and regulatory change…

Amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence – pulling credit from consumers. Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines.

Where do these numbers are come from? What does Whitney mean when she talks about $3 trillion of credit as having "been expunged from the markets"? And faced with $4 trillion in extra losses over and above that figure, how on earth does she expect re-regionalized lending and delayed implementation of new accounting rules to make the slightest bit of difference?

Whitney is quite right of course that it’s a good idea for banks to know their customers and not to rely on centralized, computerized underwriting which relies far too heavily on FICO scores. But I’m not sure that a bigger government guarantee on bank debt is a good idea. Banks are already up in arms about paying for the present guarantee, they’re not going to want to pay any more. And the government certaintly shouldn’t guarantee bank debt for free: if it’s going to give money to the banks, it should get equity back.

As for the idea that the proposed credit-card rule will mean a drop of $2 trillion in available credit, color me skeptical. And in any case credit-card credit should really be moved off the balances of national credit-card companies and into personal loans from local banks — which are easier to pay off and carry much lower interest rates. Banks have deliberately, in recent years, made personal loans hard to get, because credit cards are so much more profitable for them. If we can reverse that trend, that would be a good thing.

It’s worth noting that the proposed credit card bill is coming into force only because national banks (invariably headquartered in North Dakota*) have shown themselves to be utterly untrustworthy and mercenary when it comes to their credit-card customers. Unless and until credit-card lenders submit to regulation by entities who represent consumers, this kind of thing will, regrettably, be necessary.

*Update: Or one of the Dakotas, anyway.

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