Major credit bureaus ... say their own analyses of credit files show that more consumers are turning to credit cards. TransUnion last week said total credit-card balances increased 4.8% in the fourth quarter to $1,694 per user from the third quarter- more than double the growth it has typically seen in prior years over the same period-with the steepest increases in states that have been hit hard by the mortgage crisis, such as Florida, Nevada and California.
In a separate survey released last week, Discover said 52% of consumers it surveyed in March expected to spend more in April on household basics by cutting back on discretionary expenses, such as vacations, or by setting aside less money for savings and investing. That is an increase of 12 percentage points from its February survey and close to the highs seen last November, when gas prices spiked.
Now don't get me wrong. I understand that a lot of working Americans are having trouble making ends meet these days. But the average household credit card debt is now over $8000, and they didn't get there last week. They piled that debt on during the relatively normal years, buying things they wanted (as opposed to needed) but did not have the cash to buy at the time. Now that the nation (and the world) is in a recession, heading towards something worse, these credit junkies are responding by piling on more debt. (I just had an image of them as Dicksonian little Oliver Twists facing their bankers with the hands out, "You want MOOOOORE credit?")
Let's look at it another way. Imagine that these folks were in a boat that was filling with water. Would the correct solution be bailing water out, or adding more water to the boat? These folks have decided to add more water to their already sinking boats.
Rather than bite the bullet, everyone from Washington to Main Street, seem determined to emulate Wile E. Coyote. You know, like when Wile chases the Road Runner right off a cliff, running on thin air as long as he doesn't look down. No one wants to look down.
Veteran Washington Post reporter, David Ingnatius, took a look down that abyss and didn't like what he saw. Washington's solution to the credit crisis is to make credit even easier and cheaper by having the Federal Reserve bolster lender's balance sheets by assuming their bad debts.
The Fed has pledged itself to a rescue package whose ultimate scope is unknown but that will put at risk the nation's most precious asset, which is the Fed's credibility. How much bad debt will the Fed have to assume? Nobody knows. Estimates of the subprime portion range up to $400 billion, but that's just the beginning. The consensus among analysts is that losses in credit markets will total at least $600 billion, but suppose it proves to be double that, or triple?
"It's not a liquidity crisis, but a solvency crisis," says my banker friend. "Can the Fed really take on $1 trillion of impaired securities? $2 trillion? More?"
Another very smart man, billionaire investor, George Soros, told investors during a conference call last week that the credit crisis was far from over, and urged regulators to move faster to contain the damage from the collapse of the housing finance markets.
"I think the situation is more serious than the authorities admit or recognize," Soros said. "He pointed to the potential for huge losses from complex investments linked to the U.S. subprime mortgage market, like credit default swaps, which allow investors to put bets on the likelihood that companies will default on bond payments. He described the market in credit swaps as a sword of Damocles.
"This $45 trillion market is totally unregulated. That's more than five times the entire government bond market of the United States. It's almost equal to the entire household wealth of the United States."
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