The credit crisis is about to hit our quality of life according to a recent article in Fortune.
We are used to being able to afford a higher standard of living each year.
Even with stagnant real incomes, we can always live a little better every year through borrowing and pretending that our living standard is still rising, just as it was for decades. Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing. Since credit card debt has been growing much faster than the economy - more than 8% in last year’s third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup, one of America’s largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it’s getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can’t offload as much of the debt as before, they’ll have less money to lend to cardholders. But bottom line, the credit card money window is going to start closing - and soon.
