Freeze on Credit to Hit Credit Card Applications

Mortgage defaults were the first great shock to the U.S. economy. And now we may be seeing two other large tremors rock the financial world over the next 18 months. The growing problems that the subprime mortgage lending fiasco started may contribute to a sharp decline in home prices and a large cut in the lines of credit banks are willing to offer through credit cards.

Some analysts believe that banks will now be forced to reduce their lending risks to consumers in the form of fewer mortgages granted, less credit card application approvals and smaller lines of credit. Will this be permanent? I seriously doubt it. I view it as a purging of bad debt more than anything. Banks and financial companies must reduce risk in this volatile economic environment.

There could be as much as $2 trillion of credit lines being cut to the American consumer. And as we all know, consumer spending drives the economy. With two of the biggest markets, housing and credit cards, being sliced and diced, it will be a protracted recession that may very well last for years.