Paul Krugman with a sobering assessment of consumer behavior in the wake of the credit crunch. The simple assumption is that consumers that previously leaned on rising home values to tap equity are now, as those credit lines dry up, leaning on their credit cards. Which means they’ll be overextending themselves in (at least) two areas now. What also probably isn’t realized by many of them is that credit card companies will be reacting to the credit crisis by raising interest rates.
The a lesson in here, as well a larger looming danger. The lesson is to keep in mind that in all of the finger-pointing surrounding the bailout bill and the mortgage crisis, lawmakers will be loathe to admit that the American consumer played a large part in this. Lots of people willfully and knowingly entered into mortgages they couldn’t afford, and as this piece shows, there are a lot of subscribers to lifestyle inflation who still aren’t able to rein it in and tighten up. I imagine some have dug too deep a hole to simply climb out by cutting back.
The danger is that all of this is percolating on the outset of the Christmas season, meaning shoppers will have to pull back their spending, leading to a bad holiday retail season, leading to further economic woes.
Just curious, and an informal and highly unscientific survey here: has anybody else noticed a steep decline or complete shutdown of credit card offers in the mail over, say, the last week or so? I probably averaged about four or five a week, but they’ve dried up entirely. Granted, small sample period.
I’m curious to see what other credit offers stop appearing. I used to get the following pretty regularly:
- HELOC’s or home equity loans — several month from multiple sources
- Offers to “skip” a payment on my car loan. I get them every other month but I’d imagine this will stop for awhile.
- Pre-approved car loan offers. A few a month. Would love to see them disappear.
- No interest/no payment for umpteen year offers from retailers. Lowe’s and Best Buy in particular. I bet these keep coming, as too much of their business model depends on big-ticket purchases.
A very good article here from Newsweek about how the birth and evolution of the financial instruments that got us into the bailout mess. Especially useful as a primer on Credit Default Swaps. Election-year politics have begun to sneak into some of the coverage of the mortgage meltdown, especially in pundit-heavy havens such as talk radio, and to a lesser degree the cable news programs. This piece illustrates that at the core of the problem are (mostly) well-intended financial products that ballooned way out of control.
On a side note, I switched my Newsweek subscription to Time a few years back because I felt the quality of Newsweek had gone downhill with an increasing tendency to lean on pop-culture items. Perhaps an election year and a major crisis has been good for them, in that there’s been a noticeable uptick in substance of late. Fareed Zakariah’s work in particular is always good.