Posts Tagged ‘debt’

What’s going on vis-a-vis the Visa

11 January 2009

ned_flandersTo many, the nation’s credit card debt seems a perfect symbol of America’s bubble economy.  Business Week even speculated this past fall that credit cards might follow housing as the next meltdown in our financial system. It seems logical enough:  just as securitized subprime mortgages wreaked financial havoc, revolving credit-card loans are almost inherently subprime, as credit cards are easy to get, charge high interest rates, and have much higher default rates than regular bank loans.  And a good deal of credit-card debt has also been securitized into collateralized debt obligations and other such lipstick-on-a-pig formulations.  Some of them may still even carry bogus AAA ratings.

Business Week‘s article has a graphic that indicates that the amount of bad credit card debt that banks had to charge off was steady at about 25% from 2001 to 2007 and then shot up in 2008, to an estimated 40%, and is projected to go to 90% in 2009.  A Jan. 1 article from Reuters echoes the gloomy assessment, saying that U.S. credit card companies are anticipating possibly their worst year ever.

By the most recent measure, for Nov. 2008, total revolving credit-card debt in the U.S. was just under $1 trillion — granted, less than 10% of total mortgage debt and about 7% of GDP — but, like gas prices, credit-card bills are among the most visible reminders of one’s personal finances.  And according to the Federal Reserve, nearly half of consumers have some credit-card debt, which averages $2,200.   (Those numbers are from at least a year ago; very likely they’ve since gone up.)

My hunch is that in tough times, an unpaid credit-card balance weighs on a person a lot more heavily, even if that person is still gainfully employed.  So credit-card debt could be a major inhibitor of consumer spending, and yet another rock in the ongoing economic landslide.

College, credit, crunch

3 January 2009

A recession should tip the scales in favor of attending college, yes?  It’s part of every Econ 101 course:  the opportunity cost of attending college includes the income you’d making at whatever job you’d be working at otherwise.  So as career opportunities fail to knock, college or grad school looks like a much better option, yes?

Well sure, except you still have to pay for it.  And that seems to be a lot harder than it was a year or two ago.  And that’s apart from the smaller pool of savings for college, thanks to the $6.9 trillion lost in the U.S. stock market in 2008 and the 1.9 million jobs lost in 2008.  I’m thinking in particular of the tightening of the markets for student loans and credit cards.  Colleges and credit card companies have had something of a symbiotic relationship for years, as this New York Times article describes.

Excessive credit card debt seems to have been a major part of the bubble that just burst (and may still have some bursting to go), so it might not even be a good thing if banks were to relax their current credit-card standards.  But a broadening of federal student loan and grant programs might be a sensible investment in human capital, as part of the forthcoming stimulus package.