U.S. Consumers Face `Liquidity Squeeze' as Banks Stop Loans

[marmar]

U.S. Consumers Seen Facing ‘Liquidity Squeeze’: Chart of Day


By David Wilson

Dec. 1 (Bloomberg) -- U.S. consumers are headed for a “liquidity squeeze” as banks grow more reluctant to provide mortgages and shrink credit-card lines, according to Meredith Whitney, an Oppenheimer & Co. analyst.

“A new era in the overall financial landscape” is unfolding in which many households will have to cut debt, she wrote in a report today.

The CHART OF THE DAY displays two indicators of consumer indebtedness, the amount of mortgage loans outstanding and credit-card lines from commercial banks. Both reached plateaus this year as housing prices dropped and unemployment rose.

“The entire mortgage market hit a wall,” Whitney wrote, adding that home loans probably fell last quarter. There hasn’t been a drop since the second quarter of 1982, according to the Federal Reserve data cited in the chart. The Fed will release third-quarter figures later this month.

Whitney also projected that banks will reduce unused credit- card lines by 45 percent during the next 18 months. That works out to $2.13 trillion, based on the total credit lines available from all lenders insured by the Federal Deposit Insurance Corp. as of June 30, according to the report.

“We are now beginning to see evidence of broad-based declines in overall consumer liquidity,” she wrote. Along with a rising jobless rate, the reductions will bring “a pronounced downshift in consumer spending.”


http://www.bloomberg.com/apps/news?pid=20601109&sid=a1KBBJn8ORc4&refer=home

[Donnachaidh]

1. wasn't the reason for the bailout to keep this EXACT thing from happening?

Weren't we told that our tax money was being given away to banks so they could start making loans again?

[CoffeeCat]

4. Yes, but that never made sense to me...

I understand that our government defined the problem as "credit being frozen" and as
you said, the solution was to provide money for consumers and businesses could take
out loans.

I always thought that sounded a bit "off" because the last thing that people want
to do is take on additional personal or business debt. People are losing their
jobs, their 401ks are shrinking and the economic future is uncertain. This just doesn't
seem to be an ideal time to add on that sun room or renovate the kitchen. And as for
businesses--most are seeing falling profits as consumers spend less. What business
would want to take on more debt now--when they can barely pay their current bills?

I never understood how making money more available would help--when most people
are being very conservative with money, and not taking on additional debt.

[Gman]

2. This is not a "new era"

Mark my words... As soon as this thing turns the corner, as long as there are people that make money on lending money and as long as there are people that will run up their credit cards to live beyond their means the greed and materialism will win every time. It may be a few years, but the graph has plateaued, it will maybe dip, then it will resume the climb upwards again.

Isn't it interesting that the credit card companies who wanted it both ways and pushed through the absolutely immoral bankruptcy bill now are facing their own liquidity crises. THey are cutting back credit lines because they have no money to lend. It's all a vicious circle. The route around the circle has slowed, but the circle will always be there.

[Xipe Totec]

3. I owe a mortgage worth less that 1/3rd my home equity

When rates dropped a few years ago, I refinanced.

Not for lower payments, but for a shorter term.

I shaved seven years off my mortgage payoff date by refinancing into a 15 year mortgage, while keeping my payments the same.

I owe zero on my credit cards, and own my car outright.

This may be a new financial landscape for many, but this has been my world all along.


I feel sympathy for people suffering through the liquidity freeze, and have no objection to spending Tax dollars to bail them out.

But the easy credit spigot has to close.