The New Wave Of the Crisis

In the last three months of 2008 the U.S. economy was violently hit by the credit crunch and the liquidity crisis between banks and companies. Now a new wave is forming on the horizon.

Whether as a preventive measure or because of a lack of liquidity, banks and companies are cutting off credit to clients more and more – cutting off credit to those who, after all, fuel the economy: consumers.

Last week, the Fed (the U.S. central bank) created a new credit line of $200 billion exclusively to finance paper to back consumption-related debt (credit cards, basically), and financing for vehicles and students.

The aid is small when compared with the almost $1 trillion in credit card debt owed by American consumers in October. And this is a lot less than the projection by the financial analysis firm Oppenheimer & Co., which estimates that around $2 trillion in consumer credit lines will be taken out of the market over the next 18 months, the equivalent to 45% of the total financing available for credit cards in 2008.

If this really happens, the American economy will not only sink further, it will also take longer to recover.

In summary, despite emergency lines of credit, the problems that are heading for the American credit card companies have already made share values drop 80% in 2008. It only foreshadows what might happen.

Cutting credit in the U.S. is a problem of great proportions. Immense proportions, unfortunately.

Not only is the economy already in recession, but Americans, the current generation of whom are driven by credit, have never been in so much debt (in addition to losing almost half of their net worth in the markets).

On top of all of this, it is certain that unemployment will increase. The president-elect himself, Barack Obama (he will be sworn in on the 20th of this month), is already talking about double-digit unemployment rates (10% or more) by the end of 2009.

An Equifax Inc. survey conducted in November on the credit history of 11 million Americans showed that 131,600 people declared personal bankruptcy that month. That number is 37% more than the same month in 2007.

There were even more significant increases in the total amount of people who are 30 days late or more on their mortgage payments (Americans owe more than $10 trillion in this area), credit cards, or car payments.

This data, once again, is from November. Taking into account the speed of the crisis, it is probably already very different.

Based on predictions from October, some estimate that the U.S. credit card industry alone will lose more than $70 billion to defaults.

Ironically, many of the institutions that received help from the U.S. government (Citibank, $45 billion; Bank of America, $25 billion, among others) are the ones who plan to limit credit to their clients – the citizens who financed the bailout.

Seeing the potential for future losses, these banks are simply “hoarding” the money from the contributors.

In short, they expect worse days.