Credit Card Crunch?

Frankly, I am tired of this topic but every time I try to check the data – as best as I can – it doesn’t seem to support the rhetoric we are hearing from people at the top [despite real problems blah, blah, blah].  Here’s Paulson today:

At least some of the remainder [of the bailout money], Paulson said, should be used to
reinvigorate the market for credit cards, student and auto loans —
which combined account for some 40 percent of consumer credit.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said. (emphasis added)

I’ll focus on credit cards.  It is true that credit card offers, i.e. junk mail, is down:

…one billion fewer offers mailed during the course of the year.
Households with incomes under $50,000 will receive about 700,000 fewer
offers in 2008 compared to 2007. These households account for the
majority of the cutback and clearly indicate a major change in strategy
by card issuers.

"The souring economy and industry consolidation have driven volumes
down to levels not seen since 2003 [Crisis! AT]" said Andrew Davidson, Vice
President of Competitive Tracking Services for Synovate’s Financial
Services Group. "Card issuers are taking a more cautious approach, with
lower income and high risk households receiving fewer offers or no
offers at all."

But even so:

Despite the decline in offers for new cards, US consumers still
have access to an increasing amount of credit. Household credit lines
across all cards edged up to an average of $27,626 per household (YTD
3Q 2008) from $26,902 in 2007 despite evidence that issuers are cutting
credit lines on certain customers.

…"Much has been reported about issuers reducing credit lines for
certain customers but this is not the case for the majority of people.
Across the industry as a whole, we continue to see credit access and
usage at record high levels" said Davidson.

By the way, after listening to Tyler and me debate this topic Bob Murphy and Megan McArdle decided to run some tests.  So if you prefer your data by anecdote you can read Bob’s results here and Megan’s here.  I am partial to Megan’s hypothesis #5.

Comments

1) Increased YoY average credit line $ per household means pretty much nothing.

2) I would bet that Megan McArdle has a pretty good FICO score. I don't doubt that people with very good credit histories will continue to enjoy access to credit. Think marginally though.

3) That said, even if it means short- to intermediate- term pain, it's in our collective best interest if consumers learn to ease up on the reliance on credit.

4) Paulson needs to be stopped. I really think he's losing it.

I attended an MBA information session last week & the financial aid spokesperson said that last year they had 3,000 sources for private student loans, and that this year there are 4. They said they currently don't have any certain sources for loan consolidation.

"after listening to Tyler and I"

...Tyler and me...

(damn! I heard Obama do the same thing last night on TV. But that doesn't excuse it.)

> (damn! I heard Obama do the same thing last night on TV. But that doesn't excuse it.)

IIRC Bill Clinton also said "...Give Al Gore and I a chance...". I think I read about that in Steven Pinker's _The Language Instinct_. If a little hypercorrection is ok with Steven Pinker, it's ok with I.

This extension of the TARP/TERP isn't directly to protect the cardholders, it's to protect the card issuers:
For example, Amex (formerly an excellent 'card issuer', now a fragile 'bank') has $127bn in total assets but retail deposits of just $7.2bn, so they have to roll $120bn in the CP market to keep going. That market has worsened recently.
Of course if Amex defaulted, then many cardholders might struggle too - so it's potentially a general problem - but only insofar as a GM default would be bad for manufacturing jobs generally... oh - yeah. Sometimes bad things need to happen.

Before debating "What To Do", can someone identify the ideal cost and availability of car loans, student loans and credit cards? Should student loans be available to students of high-default colleges? Dodge Charger car loans to low income? Credit cards to college students? At what level should the government stand astride the Great Deleveraging and say "STOP!"? 2006? 1985?

If the answer is, "I don't know", then should we have Treasury on the case at all?

I don't doubt that people with very good credit histories will continue to enjoy access to credit. Think marginally though.

But surely one lesson of the recent unpleasantness is that loans were being made to people who couldn't afford them, yes? So quite obviously on the margin one would want loans to be somewhat more difficult to get, it might seem.

I'll tell you how the credit card crunch worries me... Veterinarians. I can attest to the fact that they are having to downsize quickly and cut costs because customers aren't spending money on pet care. MSNBC has a story today:

http://www.msnbc.msn.com/id/27665004/from/ET/

I hope Paulson will include veterinarians in his bail out.

As I said, I think the responsible members of society won't have trouble accessing credit lines, and that's how it should be.

Agreed.

But what happens as this financial mess spreads and orders of durables and consumables decline, folks stop buying, more people become unemployed, etc.?

The problem is spreading, so that many who want to be responsible may not be employed.

On credit card spending, propping up our unreasonbly high expectations and consumption with more loose money risks inflating demand for oil/gas again. There goes our risk models again.

After seeing Alex link to my blog, all of my hostility for Tyler instantly evaporated. I realize now, in retrospect, that for months I have been engaged in a subconscious campaign to get hits on my blog. I hedged my bets by being a jerk to Tyler and a suck-up to Alex, not being sure which strategy would be more likely to induce a link. It seems nice guys finish first after all.

These are boom times for loan sharks.

errata:
"hey" s/b "they"
"portion" should be "proportion", i.e. risk sharing. "re-insuring" may have been a bad choice, too: You want to say that you'll share 20% of the losses, say, on credits below FICO X (or come up with a sliding scale). If you do not leave a residual risk with the borrower, i.e. if you go up to 100% for a slice as you might in re-insurance, the borrower(s) may lose their credit discipline, right?

This could "unfreeze" the lender / borrower panic associated with medium quality credits...

There are a couple of realities here. 1. Credit is going to be there but parameters will change. It will be more stringent. 2. Your credit score is going to be more important than ever. No one ever gave you the lessons in school. Rent your apartment 101. Buy your own home 101. Buy a car 101.

It all leads back to credit and if you really want to be vigilant about your credit, be educated about credit.. Visit by buddies site at www.FixMyReport.com we used to work on credit and debt back in the day.

ZBicyclist, if you were to tell me that your daughters have FICO scores in the 600s or below, that might be more meaningful.

Meter, I agreet that including the FICO scores would be more meaningful, but I don't know them.

Student loans: The conspiracy theorist in me smells a rat here, although there are a couple of potential rats.

(1) Student loan tightening tends to make big powerful institutions unhappy (I'm not talking about the students).

(2) There may be fear the government will force different terms on these types of loans retroactively.

(3) There's now no effective mechanism for repackaging these loans and finding a buyer (a temporary problem - where there's a market...)

IMO (and remember I do have a kid in college, who I'm paying for) this is a golden opportunity to force more efficiency on the educational system -- i.e. lowering tuition.

This may, actually be one of the few forward looking actions taken by Treasury. I believe the problem, seen by Paulson et al, is the fact that previously bullet proof securities couldn't get sold (this is why AMEX is now a bank, they could not find a buyer for their receivables and therefore had to go to the Fed for cash).

Since there are so many diverse CC lenders out there it will take time for lower credit-risk people to feel a pinch, but by that time, as Keynes so eloquently put it, we will all be dead!

Also, the idea that there is no repayment risk in student loans is comical. http://www.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html

thefinancedude has it right. It's the high-power money that was sloshing around that's gone. If they can't get it restarted then the knowledge+trade+service+consumer economy is dead. No consumer spending and no service jobs equals no trade.

When do you see this whole recession letting up?

True, true... we got hit hard. Credit is low now and customers aren't buying nearly as much as they used to. This has hit the banks because credit cards account for $30 million revenue per year and if people aren't spending that's going to decrease a lot. Retailers are hit for the same reason.... no buying no revenue. Then credit card processing companies are having a hard time because they get paid per transaction. The effects of the crisis reach everywhere and I really don't see how we're going to get out of this one without taking a lot of damage.

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