Wednesday, April 22, 2009

Meredith Whitney points out the pending bank run on credit.

Meredith Whitney is kind of like my hero Nouriel Roubini except a tad less knowledgeable but significantly more aesthetically pleasing.

I was reading an interview with her by - interestingly enough - Steve Forbes two weeks ago. That promised to be an awkward interview..."hey Steve, here is specifically how your nutcase libertarian free market fundamentalism brought systemic collapse to the United States of America..." Unfortunately Steve was too dense to understand that was what was happening, but there were other interesting points made.

Specifically, Meredith points out how credit card companies cutting their lines is bad. It's kind of an interesting exercise, actually. We're essentially watching a $10 trillion real-world application of the prisoner's dilemma.

"So, banks are cutting lines for a couple of reasons. No. 1, risk aversion. No. 2, they don't want to hold regulatory capital against unused lines when they are so capital-dependent. And No. 3, which is also risk dependent is, where I have a monogamous relationship with you as a mortgage borrower, I have multiple relationships with my credit cards.

So, when, you know, cameraman A cuts my credit card line, I have more exposure to you and cameraman B. So, you don't want to be the last one holding the hot potato. So, you pull your line. And I'm stuck with fewer lines. And my borrower's, my lender's stuck with more exposure to my line. That's the last place he wants to be.

So, the credit card version of a run on the bank?"

Meredith goes on to predict 50% of outstanding lines to be cut -- totaling $2.7 trillion. That's more than the budget of the United States of America (well...it used to be).

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