Think things are bad now? They could get a whole lot worse before they get better.
As bad as the problems in the world financial system have been, most people have seen the impact largely in two areas: their home values and their portfolios. But some disturbing trends are starting to appear that underscore the necessity of getting the system fixed without delay.
Shrinking credit limits
As the economy has worsened, many consumers have increasingly relied on their credit cards to make ends meet. At the same time, struggling banks that are reeling from liquidity problems and massive potential losses are responding by cutting back on credit limits for customers. Wells Fargo (NYSE: WFC ) , HSBC (NYSE: HBC ) , and Bank of America (NYSE: BAC ) are among those reportedly reducing credit limits. The problem is reaching international proportions -- Goldfish, a U.K. credit card formerly owned by Discover Financial Services (NYSE: DFS ) , has cut limits for U.K. customers.
With delinquencies on the rise, it's easy to understand why banks want to cut outstanding credit. In doing so, they may succeed in avoiding a repeat performance of the mortgage meltdown within the somewhat similar credit card asset-backed securities market. And for many cardholders who don’t use nearly as much credit as banks have given them, limit decreases won't have a big impact. But it will force some consumers to address their budget problems sooner than later.
Meanwhile, Congress remains deadlocked on what has become an annual ritual: extension of the relief provisions that prevent millions of taxpayers from paying thousands in alternative minimum tax. Debate over the so-called "AMT patch" has centered on how to pay for the lost tax revenue, as well as certain other proposals that have been attached to different versions of the bill in the Senate and the House.
Just as checks of $600 per adult and $300 per child for the majority of taxpayers helped stimulate spending, a sudden additional tax bill of $2,000 or more could have a chilling effect on an economy that's almost certainly headed for recession. Although Congress has no shortage of important issues to consider, this is one that lawmakers shouldn't put off until late December again.
Falling gas prices are a tiny bright spot in the economic gloom -- except for those who can't find any gas to buy. Weeks after Hurricanes Gustav and Ike initially curtailed production and distribution from Gulf Coast refineries, reports of long lines and limited supplies of gasoline in the Southeast are eerily reminiscent of the 1970s OPEC crisis.
Of course, if we get through the rest of hurricane season unscathed, these problems should get resolved once normal production and distribution resume. Yet the episode shows the fragility of a vitally important engine of our economy -- and is an indicator that is in tune with the psychology of everyone who depends on a car to get around.
Although government stimulus checks helped boost retail spending during the summer, recent readings have shown substantial drops, potentially foreshadowing a terrible holiday season for retailers that have already been hit hard. Recent downgrades of retailers Target (NYSE: TGT ) and VF Corp (NYSE: VFC ) are just the latest indicator of fears of a slowdown. Even seemingly invincible Apple (Nasdaq: AAPL ) led the market down yesterday as analysts saw slowing demand for its popular products.
All of these issues add up to more potential pain for consumers. For investors, who saw $1 trillion of stock market value evaporate in yesterday's freefall, the last thing they need is more bad news. But if the contraction in credit starts forcing consumers to rein in their spending -- as it almost certainly will -- you can expect to see the effects of the financial crisis expand far beyond Wall Street.
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