Credit Card Catastrophe

If the credit card article I referenced in this morning's StupidiNews is accurate, we're in a colossal amount of trouble financially.

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 or credit-card lines to decline by 45 percent."

That would take out $2 trillion in consumer spending power, despite the fact that interest rates have once again hit the Greenspan line and will almost certainly be under that come next year.

In other words, the $700 billion stimulus package Obama and the Democrats are planning won't be nearly big enough when the credit card companies are taking almost three times that back out of consumer hands.

That package too will fail. So what's the problem with credit card companies? Why are they nuking consumer credit lines across the board? Here's a major reason:

Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.

"...We are now beginning to see evidence of broad-based declines in overall consumer liquidity."

"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated Nov. 30.

Those five lenders, if you're wondering? JPMorgan Chase, Bank of America, Citibank, Capital One, and HSBC, some of the same financials that are scrambling to stay afloat. Citibank, part of Citigroup, is already in serious trouble. These companies are going to be cutting off credit card lines left and right in order to stay afloat, and the results on our consumer-driven economy will mean devastation when coupled with rising unemployment.

If consumers don't have the jobs and the credit to buy, then our economy shuts down and will stay down for a long, long time. The economic crisis could last well into 2011 or more at this rate, almost certainly turning a bad, bad recession into borderline depression. There continues to be no visible bottom to the economic crisis, no light at the end of the tunnel that isn't the headlights of oncoming train after oncoming train.

It's a sobering thought that 18 months from now, December 2008 will be considered part of the good times for America.