Meredith Whitney Warns Credit Cards Next Credit Crunch

Meredith Whitney made a name for herself as being one of the first financial analysis to warn of a pop in the housing bubble and a resulting crisis in mortgages and the housing market. Now she is warning of a soon to come banking crisis with a credit card crunch.

“Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is under appreciated is the role of credit-card availability in that spending,” Whitney recently wrote in the Wall Street Journal.

Ms. Whitney said that though credit was extended “too freely over the past 15 years” and rationalization of lending is unavoidable, what needs to be avoided was “taking credit away from people who have the ability to pay their bills.”

Whitney stated that available credit lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.

“Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy,” Whitney said.

Banks are very concerned about the escalation of the default rate for credit card debt that is recently running at about 8.3%. That is extremely high by historical standards. However, the actions of many of the banks are making matters worse. The banks have cut credit lines and increased interest rates and fees to good customers as well as to those customers who have financial problems. The altitude seems to be to soak the good accounts to attempt to make up for losses on poor accounts.

No doubt that as the economy falls further in a long crisis depression banks will be pressured from all directions. If credit default swaps don;t bring them down the added weight of credit card debt not being repaid just might. Within a year or two the banking system in the United States will be structured far differently than it is today. I expect that Meredith Whitney would agree with that statement.

Get ready for rapid change and the survival of the few as the long crisis continues.