My oversimplified theory of the financial crisis is that the economy has gone in the tank because the lending practices of the credit card industry came to be accepted in the mortgage lending industry. As I’ve pointed out many times, the now-infamous negative amortization mortgage was, essentially, buying a house on a credit card. Stated income mortgages made it possible to qualify for mortgages the way you qualify for credit cards — there was no verification of actual income. And the list goes on. The housing bubble was fueled by lending people more money than they could afford to borrow so they could move into houses that they could only pay for as long as houses continued to rapidly appreciate. This basic mechanism is what made it possible to create all of the other financial instruments that led to easy profits for a time and that are crushing banks, insurance companies, and just about everyone else right now.
Joe Nocera prints an anonymous letter that indicates that these bad practices will soon come back around and ruin the credit card issuers themselves. Here’s an example he provides:
I recently had a client apply for a credit card. She is a homemaker, with no personal income. The house she lives in is in her husband’s name. She would have asked for a $3,000 credit line, just to pay miscellaneous expenses and to establish some credit on her own. So the computer is told that her household income is $150,000; her mortgage/rent payment is zero. The fact is that her husband’s mortgage payment is $7,000 a month (which he got with a no income verification loan). She had a good credit score, but limited credit since she has only lived in this country for the last three years. The system gave her an approval for a $26,000 line of credit!
I’m not sure the focus on preventing credit card companies from sending out so many pre-approved offers is the right plan, but I think he’s correct in predicting that the banks are going to be coming back to the federal government for more bailouts when the unemployed fill up their credit cards and start filing for bankruptcy.