Whitney: Consumer Credit Doomed

Wednesday, December 10, 2008 10:14 AM

By: Elaine Barr

Oppenheimer bank analyst Meredith Whitney is more bearish about the economy than she's been in the past 18 months, and her outlook for banks that "lubricate the entire system" is bleak.

"The big banks are going to be on life support for at least 18 months or 36 months. They won't fail, but they won't grow either for another two years," she told CNBC.

According to Whitney, the TARP bailout program is just filling holes and not funding any loan growth.

"We've witnessed liquidity collapse over the past 18 months, primarily in the asset-backed issuance market," she said.

There's more of this to come, she warned.

That's why she wasn't surprised by the report from AIG today that it owes around $10 billion to Wall Street investment banks for speculative trades that went bad.

According to Whitney, the United States is entering a new era in the financial landscape of forced consumer de-leveraging. Evidence of broad-based declines in consumer liquidity is becoming apparent.

"Just over 70 percent of American households have credit cards, but over 90 percent of those households revolve at least one time a year, so they're using it as a cash flow management vehicle," she says.

"The big banks are already cutting back lines on credit cards, and in 2009-2010, I expect $2 trillion in existing lines will be cut back. That will have an extremely disruptive psychological impact on consumers. Some people will be cut off from credit cards, and that will have an impact on spending."

Whitney also expects home prices to fall another 20 percent and return to 2000 levels.

"The U.S. consumer is the major issue now," says Whitney.

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