Last night, in an e-mail Yves Smith of naked capitalism pointed out an Op-Ed piece by Meredith Whitney which ran in the Financial Times yesterday. It was a fairly somber and downbeat assessment from an analyst who has proved right on the money throughout this credit crisis. (UPDATE 1230 ET: See Yves’ post on Whitney’s Op-Ed here.
I will provide a highlight here so you get the gist of Whitney’s commentary. But so as not to steal Whitney’s thunder, I will link out to the entire article so you can read it on the FT website.
As an analyst, it is my job to do fundamental research and call it as I see it, and my bailiwick is financials. My outlook has been negative for over a year and, technically, I have been “right” on my calls. Seeing massive capital destruction has brought me no pleasure, but unfortunately I see little on the horizon that would change my outlook. In fact, after observing the U.S. economy so derailed, I feel that I must act as a citizen of this great country to attempt to offer solutions to this economic train wreck we are all involved in.
First, I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn (€2,365bn, £1,955bn) of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year.
I estimate that the mortgage market will shrink for the first time in U.S. history and that the credit card market will be 18 months behind it. While just over 70 per cent of U.S. households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product.
I share many of Whitney’s concerns as regular readers know. Luckily, Whitney provides some prescriptive solutions in the rest of her post which is linked below. However, I do want to point out a key issue regarding our situation and parallels often made to the Great Depression. The America of 2008 is not the America of 1929 in part because we were the “Alpha Creditor” of 1929 and China is the Alpha Creditor of 2008. America was the world’s largest creditor nation in 1929. That role is held by China in 2008. So, as we think forward about policy, we should look back to 1929 and think of the United States of today as Great Britain in 1929 and China today as the United States of 1929. Whitney’s ideas are forward-looking and so she does not conflate America circa 1929 with America today in her analysis.