

House of Cards: Why Analysts Fear $1 Trillion Credit Card Market Could Be Next Crash - tokenadult
http://washingtonindependent.com/26372/house-of-cards

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fauigerzigerk
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.

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quoderat
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.

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fauigerzigerk
Credit card debt is much less securitised than mortgage debt.

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quoderat
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.

~~~
fauigerzigerk
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.

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puzzle-out
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.

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mdasen
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).

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jwb119
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

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MaysonL
_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...](http://www.calculatedriskblog.com/2009/01/cre-when-reserve-runs-
dry.html)

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

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mynameishere
_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.

