The underlying causes of the subprime credit crisis in the US has spawned other crises as well; investment shifts causing unstable stock exchanges, banks losing investors, tightening credit to all sectors including governments to name a few.The one thing most of the banks thought they could rely on was their lucrative credit card business.Not anymore.
With the American consumer at the end of the rope, pockets are quite shallow these days.Of that there is no question.Many are hanging on by a thread in the face of foreclosures, dwindling portfolios, increasing energy costs, decreasing GDP output and export and they have been turning to their credit cards with double digit interest rates to survive.It is of course a delaying tactic for the inevitable.
Many would argue that the consumer has been living beyond his or her means but that is questionable in that the deceptive and often predatory lending practices of the financial industry both with the consumer and with itself has led the way for this situation.The leaders in this are also the ones looking for bail outs; the banks themselves.Their short sightedness has led them to wrongly believe the credit card business would remain.The trouble is that now they are seeing the public has been borrowing for staples not luxuries and incidentals.The public is now facing mounting credit card bills that are sure to go into default; another sting on the financial industry.
The bottom line to this whole mess is greed by the financial industry and they are only now beginning to wake up to the realities of their house of cards.The other importance here is energy.It cannot be separated because every facet of life is dependent upon it.Here again, the banks are embroiled.
Most of the investment banks are pushing the prices upward.Why wouldn’t they?If energy goes up so do their profits.Now there is a tiny hitch here.Many of the banks are hedging their futures investments.In other words, they are buying on margin.The reality is they aren’t buying they are in truth trading what they don’t own but may have to purchase later if they can't sell sooner.So far it has been a safe bet; at least until things began to cool in oil prices most recently.Again they are going to take losses.
The triple threat has come back on them.
Canadians are slightly insulated from all of this except for the fact that the credit card companies who use the banks as carriers are now getting concerned.The record IPO of VISA shares has adjusted and investors are having second thoughts.Why wouldn’t they?The net result is that the credit card companies are going to have to pull back just as the banks did with their credit.Defaults are less likely to be tolerated and grace periods could be withdrawn.Greater restrictions are a given.
Canadians do not have a mortgage crisis but the banks are holding some of this bad Asset Backed Commercial Paper that contains subprimes.They are taking losses already.Energy prices in Canada are climbing even more than in the US.Unemployment is rising as is inflation.It is only a short period of time before Canadians will see restrictions on Credit Cards.
It would be in the best interest of everyone to ensure their credit record is squeaky clean.There may be days ahead when that credit card will be essential.Also essential will be the ability to pay.