In “Credit Cards Are the Next Credit Crunch,” Whitney notes, “Currently, there are roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion are currently drawn upon.” She projected six months ago that some $2 trillion in credit card lines would be reeled in by the close of 2010, but now projects that to reach $2.7 trillion.
Whitney discusses various factors in play here, including FICO score issues and home prices.
On the policy front, she observes:
Along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.
How often have we seen so-called good intentions on the part of lawmakers turn into ugly realities for the economy? That will be the case here once again.
Also, keep in mind how important credit cards are to financing startups and small businesses. Another fact to consider the fallout of misguided government interventions in the credit card market.
Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
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