the visible hand

it is the theory which decides what can be observed – einstein

Consumers Fall From Grace

Posted by ecoshift on January 14, 2008

It looks like the recession is here: credit card defaults are rising.

Many people were going into default on their home mortgages while keeping credit card accounts current. Given the usurious consequences to credit card default, who can blame them? Letting yourself in for endless rounds of fees, mounting penalties and collection agencies that will follow you to your grave is not something most people take lightly. For an increasing segment of the population, the money must really be gone.

Real estate defaults could be tied to mortgage resets and real estate market conditions. Unemployment could be a temporary set back.  With increasing credit card defaults the chickens are coming home to roost.

While reports say consumption has not yet fallen in dollar terms, flat growth in consumer spending coupled with surging energy prices mean that Americans are consuming less. Now everyone will feel it, not just the banks. Soon we will see if the rest of the world can decouple from US markets or not.

High-End Cards Fall From Grace –
Rising Delinquencies on Charges Lead Banks to Curb Generous Terms As Profits Look Shaky
January 14, 2008; Page C1

The luster on all those silver, gold and platinum credit cards is getting tarnished.

For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks: There are growing signs that some of those consumers are having a hard time paying their bills.

It is the latest in a series of woes for U.S. financial institutions, which are struggling to contain a series of credit-related problems after years of strong profits. Banks have lost billions of dollars from soured home loans and mortgage-related investments. And defaults on commercial and industrial loans could rise later this year if the economy weakens further.

Investors and analysts will get an in-depth look at the credit-card problem this week when Citigroup Inc. and J.P. Morgan Chase & Co. — two of the biggest U.S. issuers of plastic — report fourth-quarter results. Both are expected to set aside hundreds of millions of dollars to cover mounting losses on credit cards and other consumer loans.

Americans Cut Back Sharply on Spending – New York Times
Hiroko Masuike for The New York Times

Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.


2 Responses to “Consumers Fall From Grace”

  1. Mike S. said

    One key issue being overlooked in the credit card crisisis the impact the new bankruptcy law has on eliminating debt. I would look for one of the democratic candidates needing a boost ie. Edwards to come out against the “Evil Bush” and his protectionist acts for his banking buddies. I believe a candidate could get significant traction with this stance, which would make the other candidates follow suit. If the law is repealed the line at the courthouse would be out the door with new filers looking to start with a clean slate, and the lending institutions would be left holding the bag.

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