"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."
Bank of America Corp, Citigroup Inc, and JPMorgan Chase & Co represent over half of the estimated U.S. cards outstandingsas of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.
Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults."
See: http://biz.yahoo.com/rb/081201/business_us_finance_research_oppenheimer.html
The credit card crisis is running 18 months behind the mortgage crisis. Those who have been on cash flow life support by using the credit cards will have the plug yanked out of the wall. This will exacerbate the mortgage crisis as well as the dismal retail numbers being reported. If the consumer represents 70% of the Gross Domestic Product (GDP), a 10% decline in consumer spending yields a 7% decline in GDP, and that is a serious problem.
In the 1930’s deflation was a major issue. To fight deflation, Franklin Roosevelt’s took action which resulted in a 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. This action proved to be successful in dealing with the Great Depression. Ben Bernanke is the expert on monetary policy of the Great Depression. I expect the U.S. Dollar devaluation to begin sooner than later.
A $2 Trillion reduction in credit limits by the major credit card companies accompanied by an increase in credit card interest rates will place further drag on any recovery. A forced cleansing cycle for the credit card abusers is ahead.
The underlying issue of the financial crisis is the handling of OTC derivatives. Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated.
The financial community securitized every debt imaginable- mortgage loans, credit cards, car loans, student loans, etc. The size of the problem is somewhere between 200 and 900+ trillion dollars depending on who you talk to. There is no public market for these instruments and nobody is talking about creating one. This financial crisis will not be solved without creating a financial market for these securities.
Why is there no financial market for OTC derivatives? Those in power know that a "market" would cause ‘price discovery" to occur and then we would find out how worthless or near worthless these instruments were. Once the cat is out of the bag, we would find many institutions to be insolvent. So much for transparency. The powers that be are just throwing good money after bad. The longer it takes to come to a day of reckoning, the more severe the cleansing will be. Those who profited from this OTC derivative scam are not innocent… and they know it!
Pro 28:20 A faithful man shall abound with blessings: but he that maketh haste to be rich shall not be innocent.