Thursday, October 30, 2008

Steady On - Keep Lending

The good folks over at CalcRisk ask, "No Home ATM. No credit cards. What is a debt addicted U.S. consumer to do?"

Oil prices are down considerably from last year. This will help the low-end of the market. A lot. That could keep consumption level, other things being equal, even under mildly restrictive credit conditions.

The high-end of the market will not have their "equity" to spend (maybe $200-300 bn per annum), but that has been cut back slowly for a while now, and is already priced into the home-improvements stocks, like Home Depot, don't you think?

In the Spring, the Obama tax cuts will be on the horizon, further easing the worries about a rapid deleveraging. Q4/Q1 is as much the odds-on bet for a trough consumer retrenchment as any guesstimate.

First, banks need to be pushed to keep lending. With funding rates at less than 1%, they can afford to write loan portfolios that have 7% default rates!

Second, they are going to make "their world" worse, if they panic themselves. The time to have reserved for losses is at the top of the cycle. Trying to write the best vintage of loans at the bottom to "catch up" will only create what they hope to forestall, a worsening environment.

Third, personal finance people should stop lying to people that their FICO score is in their control. It's not. It's a black box. Consumers have a lot of power in the chain, under bogus "Universal Banking". Sooner or later, someone is going to realize that consumers can threaten to take their deposits away from card companies, if they don't behave. You know, find a local bank to do your checking and savings account and cut out the card companies who panic.

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