Cutting credit cards (8 Feb 2008)

The emerging credit-card-debt crisis is as predictable as the nascent housing crisis was to anyone paying attention in 2006, when rising interest rates promised a cascade of defaulting ARM mortgages made to subprime, overextended debtors. Today's WSJ has a front-page piece about how mounting credit-card debt will likely lead to a cutback in consumer spending.

Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit.

The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.

Such a pullback may already be taking shape. Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October. And it reflects the volatility in consumers' spending habits as economic growth sputters.

What is interesting about this is that it takes the banks' shutting off the spigots to slow consumer spending. If the current credit crunch has shown us anything, it's that consumers themselves will continue to spend themselves into bankruptcy if no institutional impediments are put in their way.