Of Looming Depressions and Credit

Recessions are interesting. Even more interesting is the collective attempt of the media and government to minimize the seriousness of the upcoming economic doomsday staring the country in the face. Even the Times got it wrong by referring to the “looming recession” in an article on the decrease in consumer spending as if it were an event yet to come. As a number of people noted in comments attached to the article, its hard to conceptualize the recession as “looming” when the stock market is down 40 percent for the year, one in three houses in some communities are in foreclosure, consumer spending is down, people are maxed out on their credit cards, new credit is unattainable for anyone except those who don't need it, and the banks are broke. “I expect those sort of semantics from that idiot in the White House, not from the New York Times,” observed one reader.

I’m thinking of investing in coal, since it is bound to feature prominently in a majority of Christmas stockings this year. I’m also wondering how long major retailers like Target and even Walmart can hang on if American consumers have no credit with which to purchase their large televisions and super-sized bags of corn chips. While interbank credit liquidity has grabbed the headlines, perhaps more pernicious is the drying up of previously available consumer credit. This is a big part of the crisis that is being underreported. Here’s an example: I have a friend who had an unused Citibank card with a $25,000 spending limit and a WaMu card with a $7000 limit. After inadvertently being 30 days late on one payment on the WaMu card-with an otherwise perfect payment history-Citibank closed his account and WaMu reduced his credit limit to the balance owned. So my friend went from having a credit cushion of $30,000 to zero, in less than one month. I have heard other reports that the banks are simply slashing credit limits for no reason whatsoever and closing inactive accounts, effectively leaving consumers with no credit at all.

So, in addition to the late payment dinging his credit report, canceling his Citibank card and reducing the limit on his WaMu card caused his FICO score to drop like a stone. Why? Because he was, all of a sudden, using 100% of his available credit. Mind you, this is a person who one year ago had a FICO score of 800. Now his score is in the low 600s and probably heading further south. Does this make any sense? The banks already loaned all of their available capital to people who truly should never have gotten credit, and now they are trying to balance the books and make up for their own sloppy underwriting by destroying the credit of their remaining customers.

Mind you, these same banks were just gifted with billions of dollars by the U.S. Treasury with no strings attached in the hopes of shaking loose the credit market. Ben Bernanke, said yesterday that he "hoped "the banks would put this money into circulation, although apparently the banks are not required to do so. Given their prior track record, does anyone really think that this money will do anything to help the economy? I sure have my doubts.

Oh, well. The family and I went apple picking this week-end so at least we'll have something for the boys to sell from a cart when the whole economy winds up in the shitter. Have a pleasant day.