Credit Cards: Weighing Bad Debt Against Any Debt At All

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Bank uber-analyst Meredith Whitney wrote in The Wall Street Journal that the economy will have more problems as banks take credit cards away from people to prevent bad debt write-offs. She says “Just six months ago, I estimated that at least $2 trillion of available credit-card lines would be expunged from the system by the end of 2010. However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone.”

That leaves a possible revival of consumer spending in a hell of a mess. Most consumers are having such a rough time with their current debt along with the possibility of unemployment that they are hardly spending any money at all. If the economy begins to get better, their credit cards may have been taken away by their banks. They may have a tiny big of money to spend, but no easy way to do so. That should slow the recovery by a significant amount.

Then there are those few people who do have money now and might be enticed to spend it as deflation brings the prices for almost everything down. And there are people who will have more money because of proposed tax cuts. Without credit cards, will those people pay cash? Not likely.

Banks have already pulled massive amounts of credit out of the system by denying new loans to businesses and consumers. And extinction of the credit card will make that a lot worse. The only solution may be for the Treasury to issue plastic to consumers. Instead of the MasterCard (MA) or Visa (V) logo, they can carry a picture of President Obama.

Douglas A. McIntyre