Chadwick: The Looming Credit Card Crisis


On the surface, JPMorgan Chase’sfirst quarter 2009 earnings look auspicious, reversing the red ink of the last few quarters and exceeding what was expected by investors.

But a simple read-throughof the press release paints a different picture.

The bank made good profits on its bond-trading, a business that is highly volatile and unpredictable, while its credit card write-offs soared. And management admitted that it expects further significant write-offs and huge operating losses in its credit card business.

The problem with the credit card debt issue is that it is fast looking like the tail that is wagging the dog, the dog being the U.S. economy. The banks – not just JPMorgan Chase, but all of those that are in the credit card business—are now, after 15 years of mismanagement of that business, trying to fix it fast and faster. The mismanagement came in the form of mindlessly and endlessly extending credit to uncreditworthy consumers. It was fiduciarily irresponsible. But it was hugely profitable - until the proverbial crud hit the fan.

Today the disastrously managed credit card business threatens to be a major impediment in the economic recovery because the only way the banks can extricate themselves from the mess they have created is literally to shut down the industry. They may not view it that way, but their customers do. When you punish your best customers, the ones who pay on time and pay far over the monthly minimum, by (1) forcing them to pay higher interest rates, despite the lowest interest rates in the country in over fifty years, (2) increasing their monthly payments (3) shortening the payment terms and (4) reducing or even cancelling their credit lines, you are saying you don’t want to be in the business.

The excuse the banks are using is that the economy is difficult and everyone has to share in the pain. But who was sharing in the profits for all those years when the business was the most profitable one for the banks? Nobody but the banks reaped those rewards. They should now suffer the losses on their own.

Government involvement in industry is not good for industry or for Government. But the impact of what the banks are doing to their GOOD customers is so harmful to the economy, that it behooves the Government to open its eyes to it. It has a responsibility to its constituents.

The economy is a long way from being out of the woods.

Unemployment will continue to rise, and may well reach 10%. That means that credit card delinquencies will only get worse, not better. The solution is NOT to raise rates, but rather to LOWER them. How can it be good for the economy to lower mortgage rates, and also good for the economy to raise credit card interest rates? It is completely counter-intuitive. More than that, it is disastrous for the economy. It is equivalent to the debtors’ prisons of Dickens’ time.

Consumers: Tell your story of woe to your representatives in Washington D.C. and in your own State Government. Make your voice heard, because until then, Government has neither the will nor the interest in facing the issue.


Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.