The Bear Stearns bailout and failure respectively of two hedge funds with hundreds of millions (formerly) of equity and $10 billion+ of debt is causing some new soul searching among risk managers about the continuing sub prime overlending. The credit card issuer risk managers are taking the opportunity to tighten consumer credit for credit cards and probably soon other kinds of consumer credit.
By tightening credit card terms and mortgage terms, banks exacerbate the difficulty that sub prime borrowers may have making their house payment and refinancing their loans when teaser rates end. As lenders tighten terms, there will be a knock on effect of more sour loans. This is a game with a distinct first-mover advantage. Many consumers even in the sub prime market have more than one credit card. If Barclays credit cards (e.g., Juniper, US Air, Barnes&Noble, etc.) tighten their credit standards, Chase and Bank of America tighten their balance transfer requirements, banks that keep their offers open longest may be the ones that suffer in the event of a rise in consumer bankruptcy. Oddly, all of the acquisitions by Chase, Bank of America and others of competing credit card issuers means that they have internalized a higher share of the pain than in the last recession, but they are still fighting the last war.
The credit card and mortgage defaults may, in turn, dry up some sources of liquidity for hedge funds that buy credit card and mortgage backed securities and other consumer debt. There is still plenty of money gushing into the global financial system (China’s government and consumers are socking away a lot of money in anticipation of a labor shortage when they retire and no trillion dollar social security program to help them and expect India, Pakistan and Indonesia to join them as their demographic bulge matures coincident with speedy growth). So unwinding the sub prime fiasco will just increase the appetite for return and dollar denominated assets in other sectors of the world economy. But that’s small consolation for the millions of people caught in a credit crunch. A politician cleaning up bad credit is going to lose votes when voters find out the alternative is no credit.
My proposal is for there to be a federal car loan program and a federal health care loan program.
By becoming the credit insurer of last resort in major areas of consumer spending, the government can borrow at lower rates than consumers, give the consumers a lower rate and pocket a share of the spread.
Ideally, we could dispense with all the applications for what the money’s for (college, house, small business, etc.) and just give every citizen a line of credit for any purpose whatsoever. It wouldn’t be subsidized–this could be neutral or revenue positive for the US government. I recommend that the money be administered by IRS. Just check a box to take out a loan from the Government at tax time. I don’t think it’s in the US’s interest to exempt the new loans from bankruptcy laws (or any other federal loan), but that will have to wait for another entry.