SUN EDITORIAL:

Another meltdown?

Analysts see a possible repeat of the mortgage industry debacle in credit cards

Saturday, Nov. 15, 2008 | 2:05 a.m.

Some financial analysts and economists say credit card companies may go the way of the mortgage industry — into complete meltdown.

Credit card companies have sold off — or securitized — their debt, just as mortgage companies did. The companies benefit because they reduce their own risk and generate more money, which allows the companies to offer more credit to consumers. The credit card companies pushed for more securitized debt and offered cards to people who normally wouldn’t be eligible. To make up for any lost profit, the companies hiked interest rates and late fees and made healthy profits doing so.

Banks “have little to lose if they squeeze too hard (and consumers default), but a lot to gain if they can extract additional payments,” Georgetown University law professor and credit card expert Adam Levitin told USA Today.

The problem is that, as the newspaper noted Monday, as more people cannot pay their bills, they could default on those cards, particularly with the higher fees. As the number of defaults grows, the credit card companies face their own financial problems. And the problem could compound in the same way it did in the mortgage industry.

By the end of next year, banks could write off up to $96 billion in credit card debt, or roughly 10 percent of the nation’s credit card debt, analysts say.

Although the credit card industry is not as large as the mortgage industry, another meltdown would take a serious toll on the economy. The ripple effect is that it would further tighten the credit market and hurt more consumers.

There are bills in Congress that would curb interest rate increases and fees. As well, regulators are discussing whether securitizing credit card debit is a good idea.

Lawmakers and federal officials will have to move fast to address this problem. The last thing the country needs is another meltdown.

Discussion: 1 comment so far…

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By gunowners4obama

Nov. 15, 2008

10:39 a.m.

Suggest removal

And it doesn't take a genius to figure out that health care is headed for a meltdown, too.

Why do you think I'm a gun owner?