Meredith Whitney Fears Credit Cards Will Further Erode Consumer Spending
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In The Wall Street Journal today, Meredith Whitney penned an op-ed column about her fear of consumer credit lines being cut which could have a damaging effect on the economy.
Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. Whitney said available lines were already reduced by nearly $500 billion in Q4 of '08. She now believes that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010. She noted, "inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines."
Why Credit Lines Are Dropping?
She says, "over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month."
Whitney does not think credit should be taken away from people who have the ability to pay their bills. If credit is taken away from an able borrower, that borrower's financial position weakens considerably. She concludes, "With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."
Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon. Whitney said available lines were already reduced by nearly $500 billion in Q4 of '08. She now believes that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of 2010. She noted, "inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy. Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57% contraction in credit-card lines."
Why Credit Lines Are Dropping?
- FICO scores are unreliable.
- Credit lines were extended during a time when unemployment averaged well below 6%.
- Home price depreciation has been a more reliable determinant of consumer behavior than FICO scores. Hence, lenders have reduced credit lines based upon "zip codes," or where home price depreciation has been most acute.
- Credit-card lenders are currently playing a game of "hot potato," in which no one wants to be the last one holding an open credit-card line to an individual or business.
She says, "over the past 20 years, Americans have also grown to use their credit card as a cash-flow management tool. For example, 90% of credit-card users revolve a balance (i.e., don't pay it off in full) at least once a year, and over 45% of credit-card users revolve every month."
Whitney does not think credit should be taken away from people who have the ability to pay their bills. If credit is taken away from an able borrower, that borrower's financial position weakens considerably. She concludes, "With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively."
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