SO, you think this whole mortgage mess doesn’t affect the average, solvent American household?
About a week ago, Capital One started instituting massive increases in the rates it charges its credit-card customers.
I first found out about this because a reader sent me an e-mail complaining about the increase.
He was a long-time Capital One customer with excellent credit and he resented the bank treating him like a bum.
When I called Capital One, which is among the largest credit-card issuers in the nation, the company said it was raising rates because it could and because of unspecified economic conditions.
I pressed and a bank spokesperson basically said that the economic reasons were none of my business.
That’s what I put in my Dear John column two Sundays ago, when I speculated that Capital One could be one of the financial institutions on a growing list of those with mortgage-related problems.
A few days ago, Capital One admitted that it had massive exposure to the weak mortgage market.
In fact, the problems were so bad that the bank will take an $860 million charge against earnings and shut down its GreenPoint mortgage operation.
Some 1,900 people will be laid off in the GreenPoint closing. But that’s just one small instance where the nation’s mortgage problem is directly affecting the economy.
Then, there’s also the hike in credit-card rates. And not just at Capital One – everyone is likely to follow.
While the guy who wrote to me canceled his Capital One credit card, others will be forking over more money each month to pay their bill.
And if that extra expense eats deep enough into the family budget, those credit-card holders will eventually have to cut back on something.
Buy less food? Cheaper clothes? Drop a few premium cable stations? The dominoes will continue to fall.
The cutback made by the family with the higher credit-card bill will hurt the workers at the companies that make the products or offer the services the family didn’t buy.
And those workers will, in turn, cut back on something else.
And that scenario will be multiplied thousands of times if the mortgage debacle goes on unabated.
The Bush administration keeps trying to assure us that these financial market events aren’t going to hurt the real economy.
C’mon! How could they not?
The Federal Reserve is doing all it can under Chairman Ben Bernanke to make sure that the financial system continues to have enough cash to conduct day-to-day operations.
But Wall Street wants Bernanke to show the same lack of restraint that Fed chief Alan Greenspan did.
It not only wants rates too low but it’s hoping that those low rates reduce the risk in the stock market.
But Bernanke can’t be Greenspan.
If the current Fed shows the same irresponsibility, foreign investors may simply stop loaning money to the U.S. government.
That point was driven home Tuesday during a shockingly weak sale of $32 billion in four-week Treasury bills.
There were so few buyers and so many problems that Washington had to pay 200 basis points – or 2 percent – more to borrow this money than it did the last time. Imagine how high rates will go if investors really get spooked.
Imagine how they’ll react if Bernanke tries to pull a Greenspan and cut rates.
If rates were cut now, the Fed would be abandoning its role as champion of the U.S. currency and protector against inflation.
Bernanke will end up looking like just another political flunky.
If Washington really wants to help the housing market without any of these side problems, it should liberalize the rules for investing retirement money in real estate.