After every financial crisis over the past 10 years, the Federal Reserve has cut interest rates and pumped money into the economy. Each rescue solved the problem - and created a new one.
The next bomb from this chain reaction of bailouts and blowups will be credit-card debt. Hardly anybody is talking about it yet, but banks and consumers are laying the ground for a wave of credit-card defaults, bankruptcies and asset write-offs for 2009 or so.
Regulators and investors have discouraged excessive mortgage lending, so banks are turning to credit cards as the next growth business. They're starting to raise credit limits, lower lending standards and increase recruitment. And now that they can't borrow against homes so easily, consumers are borrowing more against plastic - even to meet higher, adjustable mortgage obligations that they can't handle from their income.
This can end only one way. The only question is how bad it will be.
The percentage of banks tightening credit-card lending standards is hovering near its lowest levels in a decade, according to a Federal Reserve survey.
Junk-mail credit-card solicitations jumped late last year, although they're still below the levels of 2005, according to the Tower Group, a financial services research firm. But more importantly, the percentage of people responding to credit-card come-ons has risen steadily and nearly tripled since mid-2005.
"It doesn't mean that banks are giving the store away, but they've eased their lending standards to be able to grab [market] share" in credit cards, says Dennis C. Moroney, a senior analyst at Tower.
Increasing market share is often banker-ese for "making lots of loans that won't get paid back."
Here's Countrywide Financial boss Angelo Mozilo talking to Wall Street analysts three years ago: "We have a strong focus on growing market share and have set a very ambitious goal of attaining 30 percent market share by 2008." These days, thanks to the dud mortgages Countrywide issued, it has a strong focus on trying to avoid bankruptcy.
When mortgages and home-equity loans were all the rage, consumers had no need to crank up credit-card balances and bank salesmen had no need to push plastic.
But cards are now the bank growth product and consumer lender of last resort. Some households are almost certainly meeting mortgage obligations by borrowing against their credit cards, although it's impossible to tell how many, says banking analyst Bert Ely of Ely & Co. Millions of mortgages issued at low, teaser rates will reset over the next two years, adding to pressure on household finances.
"I wonder how many people are out there right now getting new credit cards and just preparing for that day," says Ely.
As growth in home equity balances has fallen almost to zero, credit-card balances have increased at a 17 percent annual rate over the past six months, according to a report by Merrill Lynch economist David Rosenberg. And the trend, he writes, "is clearly accelerating." A year ago card balances were shrinking.
Card defaults are up, too. They are nowhere near the levels reached after the tech-stock meltdown and the 2001 terrorist attacks, but they will grow. The average American has seven credit cards in his wallet. Americans owe more than $500 billion on cards already. Household debt levels and debt payments are near all-time highs. And the economy is in danger of entering recession.
If banks are swallowing hard before issuing asset-backed mortgage loans these days, should they really be increasing unsecured card debt to the same people? Especially since credit-card interest can be three times as high as mortgage rates and isn't tax-deductible?
No - but the Fed is creating money, regulators eyes' are off the ball and the dough will flow along the line of least resistance.
I'm not saying credit-card pain will be as bad as previous financial blowups. I'm not even saying the Fed shouldn't lay on some lubrication.
I am saying to expect a new chapter in the chain reaction of bubbles that began 10 years ago. The Fed cut rates to fix the emerging-markets stock collapse in 1997 and 1998, and we got the Nasdaq craze. It cut rates to fix the Nasdaq crash and we got the housing bubble. Now it's cutting rates to fix the housing slump.
Easy card deals will soon be everywhere you want to be. It may be good news for retailers temporarily. But look out below.