Saturday, August 22, 2009

Meredith Whitney: What planet is she on?

In the interview below Meredith Whitney says consumer credit has already contracted by a "trillion dollars." I guess she was too busy to go look up the data, which shows that total consumer credit outstanding is $2.5 trillion and is down about $80 billion from its peak. (Get data here or see chart below.)

She goes on to say that credit will drop by more than $2 trillion.

I guess that's why she famous and gets the big bucks...truth is cheap and facts are boring.

Total Consumer Credit Outstanding (Source: Federal Reserve)


Matt Franko said...

I dont get her data points either.
The $2.5T number is what I have been following here also.

So to take a moment to defend the American consumer; I read an analysis by Gene Epstein in Barrons some time ago (before the credit crunch of 2008) and he identified that $400B/month of the $900B+ total credit card debt outstanding is actually paid off in full by people using the cards as a cash surrogate (also more secure than carrying cash).

So if you take this $400B off of the $2.5T total consumer credit and divide that remainding $2.1T by the 110M US households, that averages about $19,000.00 per household, that is it! According to the Fed in the notes in the above link, this total: "Includes automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats,
trailers, or vacations." I interpret as that is all there is including STUDENT LOANS, CAR LOANS AND MOBILE HOMES (many people LIVE in mobile homes as their residence). This $19,000 per household is all the US consumer has out on average and it is equivalent to having a car loan on a reliable mid-sized four door for the breadwinner to be able to get to work. These people (not actually Whitney here but you know the others) who condemn the US consumer as somehow over stretched by "buying TVs" are at best confused.
I'm glad Whitney brought this up, because after reviewing reality I think the consumer could come back here pretty quickly (as I dont think the consumer was ever really over stretched based on this perspective) if the RIGHT fiscal transfer were applied (and of course just the opposite if the deficit starts to shrink).
Ill keep looking at your analysis of the DTS for leading clues as to which way it is going.

mike norman said...

Right. You don't get her data points because they're just not real.

If we can get some modest job growth, given the adjustment lower in household financial obligations (as a % of income) and the high level of personal savings, this could really take off, at least for a while. In the past whenever personal savings got below 2% of pers. income, that started to be near the end of the run.

Where is the outrage? said...

Mike, It looks like it is you who didn't get their facts straight.
She has been very clear she is talking about credit available,
not credit outstanding. Its a simple
as googling her and read the articles.

mike norman said...

There is simply no such thing. Credit does not sit out there in some basket somewhere looking for a borrower. It is created endogenously--from the demand for it. So if she is saying that credit demand has fallen because total output has fallen, that's something completely different. The way she states it, there are simply no numbers that back up her claim.

Oil Shock said...

Another quote from James Madison ( the father of the constituion )

"If Congress can employ money indefinitely to the general welfare,
and are the sole and supreme judges of the general welfare,
they may take the care of religion into their own hands;
they may appoint teachers in every State, county and parish
and pay them out of their public treasury;
they may take into their own hands the education of children,
establishing in like manner schools throughout the Union;
they may assume the provision of the poor;
they may undertake the regulation of all roads other than post-roads;
in short, every thing, from the highest object of state legislation
down to the most minute object of police,
would be thrown under the power of Congress.... Were the power
of Congress to be established in the latitude contended for,
it would subvert the very foundations, and transmute the very nature
of the limited Government established by the people of America."

Where is the outrage? said...

look at your credit card / line of
credit statement etc. Each has a limit on total amount that may be borrowed. What she is saying is the limits are being reduced.
Plain and simple.

Where is the outrage? said...

Forbes Interview With Whitney:

[10:27] Credit Card Crisis

But talking about credit cards, you've been sounding the alarm talking about a squeeze that banks are--and gee, American Express already has--and other banks have, cut back on your lines. You may not have used them. But you may have thought you had $10,000. Now you have what, $500?

This is the most interesting topic for me out there, which is credit card lines. So, there are about $4.6 trillion in unused credit card lines. And there are about $840 billion of used credit lines. So, in the fourth quarter alone, I'm sorry, now of course it's $4.2 trillion. In the fourth quarter alone, half a trillion dollars of lines were cut from the consumer, half a trillion.

mike norman said...


That's consumer credit. What do you think it is? She's got her numbers WAY wrong.


Matt Franko said...

How much of the credit card lines were there to entice cardholders to spend more, or do zero interest balance transfers, or do 20% off your current purchase if you sign up for "our store's" card, or the no interest for 12 months on your first $500+ purchase at Sam's Club that I was offered, etc... so that the Wall Street crowd could make high fees for securitization of the new balances? Those credit lines were their future "inventory"!

Yes I'd agree with Ms Whitney that the cut in credit lines is definitely going to hurt the Wall St securitization machine (if that's what she means), but the current consumer credit levels that the Fed documents are the same levels that supported an economy with higher GDP, lower unemployemnt, higher utilization, higher retail sales, etc...