Credit crunch

If my personal experience is any guide, banks are starting to do something they’ve never done before: systematically cut back on credit-card lines of credit, even for borrowers with flawless credit histories.

Here’s a bit of “anec-data” about the developing credit crunch.

Having a perfect credit history, a decent income, and a fairly solid balance sheet, I have been a beneficiary of one of the stranger stunts performed by the credit-card industry: the offer of very-low-interest, or sometimes even zero-interest, loans.

These are usually for a few months at a time, after which the interest rate reverts to the normal (i.e., usurious) level. I guess the gamble is that there will be enough customers who get sucked into overspending by the offer of cheap credit and then have to pay the Shylock rates when the teaser rate runs out, or who don’t understand that you can’t play this game with a card you actually use to buy things with, to make up for people like me, who cheerfully take the arbitrage ($20,000 borrowed at 0% for six months and put into a money-market fund is like a gift of $400) and then pay in full the day before the rate goes up. And pretty reliably, a few weeks after paying off one cheap loan, I get checks in the mail from the same issuer offering me another cheap loan.

Even banks I’ve been doing this to for years never seem to catch on, and cheerfully keep increasing my credit limits, lending me lots of money on just my signature at rates way below what they’d charge on a mortgage or home-equity line of credit.

Until now. In the past month, I’ve gotten letters from two banks, one shutting down my account entirely (just after I paid off the introductory-rate loan) and another cutting my line of credit in half. The notices explain that they’ve checked my credit-bureau reports and found high ratios of debt to account limits, which is correct but no more correct now than it has been often in the past.

Now, these seem to me like very reasonable business decisions. But they would have been just as reasonable last year, or five years ago. I have no reason to think that the credit-card issuers are getting smarter. More likely, they’re getting more nervous about the ability of even prosperous folks to pay off lots of debt, and they’re reducing their exposure accordingly.

Though I’ll miss their generosity, I wasn’t dependent on it. But I did treat money available on those accounts as if it were cash in the bank for cash-flow-planning purposes, and I’m sure I wsan’t alone. If the cutbacks on credit-card lines of credit is general, it amounts to a reduction in the effective money supply. (I don’t know enough macro to know whether there’s some measure of the money supply that counts those lines of credit; if so, it must be M4.5, or thereabouts.)

So this seems to me like both a symptom of the oncoming credit crunch, and a potential cause of a further slowdown in consumer spending. It also means that one resource homeowners had to be able to keep making their mortgage payments is going to be that much less available, which could worsen the downtrend in real-estate prices.

To those of who have been wondering when the insanity of the Bush Administration’s fiscal management was going to catch up with us, the answer may well be: just about now. I think Wyle E. Coyote just looked down.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: