MY VIEW/Joe Russo – The house of cards is falling


Consumers and businesses are very simply running out of cash – Home Equity lines are being reduced or being frozen all together. IRA and 401 K retirement accounts are being tapped and credit cards are being taken to the limit. Credit Cards are the next to fall. 

The idiom of “Robbing Peter to pay Paul” is being used more frequently when referring to the consumer and business financial situations. 

Consumers have been moving cash from credit card accounts to other accounts to pay their mortgage payments, utility bills, holiday bills and most recently food and fuel bills.  I am even seeing fast food meals that total a mere $2.50 US being paid with credit cards more frequently. 

Business owners are finding business credit lines being turned off and are now looking to higher cost credit card cash advances to stay in business. 

The “cash wishing well” is quickly running dry as is being evidenced by the increase in delinquencies and charge offs. Red flags of deteriorating performance are waving all over. 

Experian’s National Score Index shows “severely delinquent mortgage accounts are up 15 percent in one year”. The report also indicates that average credit scores are slipping as well.  

One of the factors used in calculating credit scores is the total outstanding balance, as compared to the credit card limit total. Since the limits are being frozen, and the balances increasing, the credit scores are slipping.  

According to a report released by The Federal Reserve on June 6, 2008; consumer credit rose

4- percent at an annual rate in April. Revolving credit rose percent at an annual rate, and non-revolving credit rose 6-1/2 percent at an annual rate. This could be interpreted as creditors taking advantage of lowered rates, and in turn using the cash to buy essentials or paying down higher rate debt.  It can be more likely said, the consumer simply is borrowing more cash to pay everyday bills.  

The average credit score of “severely delinquent mortgage accounts” as of February 2007 was 605, and in February 2008 the average scores dropped to 599. Although, the drop was only six points or a one percent (1%) drop; when translated to consumer interest rates, this could push the interest rate a consumer pays, to levels that could push the payments due, over the top and possibly result in a “charge-off”.  Banks desperate for cash themselves, are using all the fine print in consumer agreements to squeeze every penny possible from outstanding debt. The consumer is being caught in the squeeze play along with the bank, and even the banks can’t escape (the credit compactor) either.

The $60 to $80 US per tank fill up is certainly not helping.  Also, notice that the privately owned small restaurants are slowly increasing prices to cover their costs.  In fact, I have a friend who sells cleaning products to restaurants, and he’s told me that his customers are cutting back on the supplies they are buying. In his 30+ years of business, he has never seen that happen, since the law requires that restaurants be kept clean for obvious reasons. Speaking of restaurants, the prices are going up and the meal portions are getting smaller.

Additionally, small businesses are feeling the credit crunch in another sense, because people are charging more on credit cards, hoping to pay it off later. Now there are additional fees being charged to the business owner, which further cut into the business revenue stream.

The biggest problem is that the minimum payments are going up and are becoming tougher to make every month. The monthly balances are increasing due to the rising costs of gasoline and basic food items. The downward spiral is obviously getting out of control.

Since the economy is estimated to be 70% consumer driven, I don’t think you have to be an Economist to see where this is headed.  If the consumer’s cash is depleted, there is no consumption; the result should be obvious.

The really bad news is that the US consumer is not alone, this situation is occurring throughout many Countries overseas. Australia, England, Ireland, Scotland, France, Spain and other Euro Countries have trouble as well. The “Thrifty Scot” out of Glasgow has a story about the increase in Credit Card defaults. Further, there is a story in about overextending on credit cards.  My assumption is that if the consumers can’t pay back the banks, the banks will soon be running low on cash as well. On 6/25/08 Citibank accepted 5 Billion dollars from the Kuwait Wealth Fund, with Goldman Sachs estimating a “write off” of approximately 8.9 Billion Dollars.

It was reported in the UK Herald: according to Bob Janjuah of the Royal Bank of Scotland:  “A very nasty period is soon to be upon us. Be prepared.”  The Herald said, it’s not like the RBS to go around making alarmist statements, but it has warned of a “global equity and credit crash” this autumn. Morgan Stanley bank has forecast a “catastrophic event”. The hedge fund guru John Paulson says global losses from the credit crisis, currently $300bn, may reach $1.3 trillion.

I understand that the Mid-East Countries have not yet experienced a large use of credit cards. I expect they will, and hopefully those consumers will not experience the possible problems if they allow spending to get out of control like consumers in other Countries did.

Joe Russo is a freelance journalist specializing in real estate, mortgages and consumer credit issues. He is has recently published a book titled, “Selling Your House/Condo in this Housing Emergency of 2008” . Joe’s comments and expertise has been noted in articles appearing throughout the U.S., in English and Spanish