Because we consumers no longer can (many of us).
We can’t get home equity loans to spend, because housing prices have dropped and many of us don’t have any home equity to borrow against.
We can’t spend the dividends or gains from our stock portfolios because stocks have dropped 45% in 13 months, companies are reducing dividends — and no one should sell their stocks at these prices just to buy stuff.
Some of us, of course, don’t have jobs, or fear losing them.
And now, our credit cards are going away:
(Reuters) – 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 economy consists of four parts — consumption, investment, exports minus imports, and government. Consumption is down for the reasons we see above. Most expect it to continue to decline well into 2009. Investment is down because companies don’t expand when they can’t sell — and they can’t get credit to expand anyway because of the banking crisis. (And no one of sound mind is building any houses.) Exports are dropping because the dollar is 20% stronger, which means our products are more expensive in the rest of the world.
You don’t have to be John Maynard Keynes to realize that government is the only buyer left.
And so the talk of a stimulus package, one hopes this time in the form of infrastructure — bridges, schools, rail.
The reduction of credit card lines of credit will not necessarily translate to a large reduction in consumer spending. Consumer spending is dropping now, before the lines of credit are reduced, because people are spending less and paying off their credit card debt — something that makes lines of credit less significant.
The actual reductions will most likely be felt by two groups of people. First, there are people who use credit cards to purchase things but pay their full balance every month, called in the credit card trade “deadbeats” because they don’t pay interest. They tend to carry way larger lines of credit than they’ll actually use, so the reductions in those lines of credit will have little nor no effect on their spending.
The other group is high risk borrowers — exactly the people we don’t want taking-on more debt. They’re the credit card equivalent of sub-prime homeowners, their risk of default offset by extraordinarily high interest rates. Securitization of their previous debt is one of the reasons we’re in this mess to begin with, and none of us should mourn the end of their irresponsible ways.
The rest of us in the middle — people who use credit cards to finance the occasional large, capital purchase like a big screen TVs or new astroturf for the veranda — will likely see some reductions in our lines of credit, but not big reductions. It will hardly be as if the credit spigot has been shut off, because we’re the most profitable and least risky customers the credit card companies have. We deliver relatively large per-transaction fees, make our payments on time, and don’t sweat the egregious interest we’re usually charged.
I think that the panic over reduced lines of credit is wildly overstated. The credit card problem that’s going to kill us is all the securitized, high-risk debt that’s already out there.
I have had two friends within the last year have their credit limits lowered to below the current balance, declared “over-limit” and had the rate raised to over 20%APR. Both had excellent payment and credit histories.
Both immediately responded by moving their account to another firm at more reasonable rate. Both continue to be “good bets” with a happy mix of self-indulgence and fiscal responsibility – meaning neither pay off their totals, neither do they miss payments.
Our financial institutions greatest enemy remains in the mirror.