House of Cards: Why Analysts Fear $1 Trillion Credit Card Market Could Be Next Crash | Hacker News Reader

House of Cards: Why Analysts Fear $1 Trillion Credit Card Market Could Be Next Crash

washingtonindependent.com

20 pointstokenadult10 comments

The headline is pretty misleading. The article is largely about the problem of consumer credit being curtailed by the banks, not about anything crashing. It does say that there are fears that the credit card default rate could rise above 8%. 8% of one trillion is 80 bn, which seems pretty managable to me compared to what's happened in the mortgage market.

Like mortgages, credit card debt that has been securitized has leverage on top of leverage, so even an 8% default rate will do very bad things to banks and other companies who have purchased it using leverage. (Often, the securitized product itself is leveraged.)

People were saying things like this in the early stages of the sub-prime crisis, when the default rate was still well below 10%, and everyone was saying, "The default rate is so low; why in the world is it causing all these problems?"

Welcome to the wonderful world of leverage.

Credit card debt is much less securitised than mortgage debt.

You're right. Only about half of credit card debt is securitized, while about 90% of mortgage debt was.

However, the banks are in much, much more fragile condition than they were before, and this will have a disproportionate impact right now.

While it's not the end of the world, it's another thing piled on a whole heap of bad things.

It'd be a mistake to underestimate the impact of this, just as we've as a society so far made mistake after mistake in underestimating how bad this financial crisis would prove to be.

I completely agree about the compounding effect of the credit card problem and I'm really far from being optimistic about the financial crisis. I think this has a long way to go.

If banks get deeper into trouble and smaller countries have to rescue them, eventually people will ask whether those countries are going to default and who gets hit by that and so on.

Anecdote: when I started uni in 1999, and went to the freshers fair, there were four major high street banks with stalls offering credit cards. The average credit card debt is now £2,000. I've never had a personal credit card, only a business card, but the complete lack of education/awareness in the UK over credit card debt is worrying.

Personally, I don't see it happening. I think it's terrible the credit card debt that people have gotten into, but I don't think it will crash.

Why? How hard is it to make minimum payments on a few credit cards? A hundred a month? Credit cards have terms that allow borrowers to just keep going. Typically, it means that people end up paying way more than they should, but in this case it also means that they're unlikely to default.

Plus, what are credit card bills as a percentage of one's budget? Usually a much lower percentage than housing. So, it would be easier to pay credit card bills than mortgage bills even if they were to be on the same terms.

The level of credit card debt is very worrisome and I hope people reevaluate that situation, but I don't think we're going to see massive default rates simply because the way that credit card agreements are structured allows the borrower to make very low monthly payments for a long time rather than creating a confrontation that could lead to default (as mortgages do).

this isn't really a new argument.. see this NYT article from October, which was one of the first major outlets to pick up on the story.. http://www.nytimes.com/2008/10/29/business/29credit.html

having said that, i completely agree that the CC storm is something to be concerned about

the CC storm is something to be concerned about

as is the commercial real estate crash that is in the process of unfolding... http://www.calculatedriskblog.com/2009/01/cre-when-reserve-r...

many local and regional banks have larger exposure to commercial real estate and construction loans than to residential mortgages

In 2008, the average credit card balance was $11,212

This has got to be skewed badly by those people who cleverly have 250,000 dollars at 1.7 percent (introductory) interest.

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