Nice piece here in the Economist on the mounting troubles in the land of credit cards. Regular readers know it is not the banks that I am so concerned about, but the consumer. As much as the bankers want you to believe this is a crisis about them – it’s not. It’s a crisis about you – the consumer. The banks simply exacerbated the problems. The credit card issue gets to the real heart of the issue and the troubles that the U.S. consumer is likely to face for years to come.
The rise in unemployment—which card defaults track and may now be exceeding, given the recession’s severity—has spattered a once-profitable business with red ink (see chart). David Robertson of the Nilson Report, a newsletter, expects card write-offs in America to hit $94 billion this year, up from $61 billion in 2008.
As hopes that credit cards would avoid the pain felt in mortgages have dwindled, so has any chance of the industry avoiding a political backlash. This week both houses of Congress voted through a bill that would sharply curtail card issuers’ ability to charge punitive fees and raise interest rates. Barack Obama, who has railed against card issuers’ “anytime, any-reason rate hikes”, was expected to sign it into law after The Economist went to press.
This is an interesting double edged sword. Not only are the credit card debts killing consumers, but the growing number of delinquencies is hurting bank balance sheets. Throw in the recent law on card rate changes and you’ve ruined one of the financial industries golden gooses.
Source: The Economist