here is why this cannot go on:
we have this "crisis" but due to the lack of will in Congress, regulators and The Fed they fail to force the bad assets out into the open where they are marked to the market and the people who have those bad assets go under. Doing so would result in a lot of bank bankruptcies. This is thought of as "bad", but in fact it is only bad for the banks that have lied - the good banks (and there are some) and credit unions would win huge from such an event, as they'd not only get your deposits but also your loan business.
Nonetheless most if not all of the "big banks" are the ones who have Congress in their pocket and they're on the bad list.
So, in response to this, fees and interest rates have gone to the moon. I run no balance on my plastic and have a near-perfect FICO (being "dinged" only because I don't carry balances), charging and paying off every month, generating a very nice "discount" income for any card issuer that gives me credit. Nonetheless I have seen interest rates repriced "for market reasons" up to 13, 14 and in one case to 17.9%.
In addition the interest rate available on a 1 year CD has gone down from 5% to 1%.
What this does to the "spread" and thus private consumer activity is tremendous. Revolving credit is instantly repriced on the outstanding balance at the new interest rate, as are the CDs when they roll over, typically after a year.
For the "typical Grandmother" who was making 5% on her CD and paying 9.9% on her plastic, the spread was 4.9%. That is, 4.9% was the "real cost of credit" to her annualized.
Reasonable.
Now the credit card is 18.9% and her CD earns 1%. The spread is now 17.9%, or nearly 18%, an increase of 12.8%.
For the "subprime" borrower it is awful as well. He has no savings, so the CD rate means nothing. But his credit card went from 20% to 36% due to missing one payment. He's seen a spread increase of sixteen percent.
Why does this matter?
It matters tremendously!
Remember, from the above there is $2.5 trillion outstanding in consumer credit. An increase of just ten percent in the spread cost for money means that $250 billion dollars each and every year does not get spent on consumption (and employment of those who make what was consumed), it instead goes to the banks to paper over their fraudulently-marked paper!
for the entire interesting article:
The Market Ticker
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
