By JLP | August 23, 2008
Another reading assignment: The Next Credit Crunch (read it, it’s very interesting). The next bubble according to Geoff Colvin will be a standard-of-living bubble due to a credit card crunch.
…a big crunch is coming – and here’s why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup, one of America’s largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it’s getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can’t offload as much of the debt as before, they’ll have less money to lend to cardholders.
Okay, I’m no market expert or economist, but here’s how I see this playing out:
1. Lots of retailers are going to go under. How many? I have no idea. But, I will say that those that are currently struggling are most likely going to be toast.
2. Lots of restaurants are going to follow the path of the defunct retailers. There’s too much competition and margins are being squeezed by higher costs. Couple that with customers cutting back on their budgets and not having access to credit cards and you have a messy situation.
3. Just about anything beyond necessity is going to be at risk.
I wonder if the government has a credit card bailout in mind?