Op-Ed: Big lenders propose debt forgiveness in U.S. credit card crisis

Personal budgets are being crippled, and job markets are being hurt. Disposable incomes are a driver of the fundamentals of a traditional economy. This situation hasn’t happened before, so nobody’s really very sure what a simultaneous crash in disposable incomes and credit does to an advanced economy, but it’s not likely to be good. The fact is that modern economies are a sort of multiple balance between credit, assets, and income. What’s called “growth” often reflects credit based business. At the top of the tree, credit supports new business expansion, finances new jobs, and rewards investors, encouraging more investment. However- down the food chain, at credit card level, spending is done in excess of real current income. The credit card is a mini-mortgage. Americans own an average of ten cards, based on the number of cards issued relative to the number of eligible card holders. 158 million people hold 2 billion cards. In a big economic crash, the model falls to bits. The current accepted figures are that the US economy has taken a more than trillion dollar hit in defaults. During a time of serious credit problems, that’s a trillion dollars worth of damage. It’s a trillion dollars that has effectively gone out of the credit market, when credit is the big need for restarting the economy. Mediachannel.org explains what’s doing the damage:

• By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.

• Capital One, one of the biggest credit card banks, was forced to write off $1.9 billion in bad debt just in the last quarter of 2007.

•By October, according to a survey of only the leading credit card banks by the Associated Press, the value of credit card accounts at least 30 days late was up 26% from the previous year, to $17.3 billion. Serious delinquencies among some of the biggest lenders rose by 50 percent or more in the value of accounts that were at least 90 days delinquent.

• Making matters worse, or more widespread throughout the economy, just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors. About 45 percent of the nation’s $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.

Actually, that makes matters much worse, because it means those credit card debts have become subprimes, debt based securities where the repayment of debt is unlikely. Worthless investments, effectively. The credit crunch is also a job destroyer. That creates a serious economic problem which feeds directly back into the credit market. The fact of business credit and financing is that if the credit isn’t available, business doesn’t operate. It can’t get itself out of its problems, let alone grow. Lenders need a working economy. The current situation is a jagged mix of broken pieces with people getting carved up by the shrapnel. Spending is now shrinking in real terms, and the economy is shrinking with it. Retail is looking sick, globally. There’s an obvious downturn in orders and that’s feeding through the economic chains. That’s where the real indicators are showing up. That of itself is important, because the current situation doesn’t have any real precedent. Economics is looking for working models of this situation. As consumer spending nosedives, the job market is shrinking, which naturally aggravates the lack of spending. Unfortunately, these are the emerging models. The credit market has to get back into working order. The banks are trying to get something happening, as the LA Times reported this week:

When I heard last week that banks want to forgive up to 40% of some customers' credit card debt, my first question was, "What's the catch?"

"There's no catch," answered Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that helped concoct the debt-relief program. "There's no hidden agenda. These are extraordinary times and the industry is aggressively working to help customers."

… However, this isn't pure altruism. Credit card issuers would enjoy some significant benefits under the plan, making it an act of self-preservation that just so happens to be in the best interests of potentially millions of cardholders.

The idea includes additional time to pay balances for qualifying people. It’s almost as though some sort of rational process is involved. This outbreak of extended logic also comes from a most unexpected source:

The Financial Services Roundtable represents most of the leading credit card issuers, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Capital One Financial Corp.

Or to express the significance a bit further, the surviving solvent members of the US major league. Now, if a bit of economic sanity, which this looks suspiciously like, comes into play, the new administration may find it’s playing with a full deck. The irony is that all the financial market has had to do is do the exact opposite of what it did to create this mess. This is the difference between playing with spreadsheets and fiddling numbers, and doing real business with real people. It's an almost complete reversal of the principles which created the housing bubble and the credit crunch. Feeling better, guys?