Tighter Credit Permanent?

The CEO of Citigroup, Vikram Pandit, delivered a speech to end the first day of the National Summit in Detroit. The purpose of the summit is basically just a meeting of the minds, business, economic and government leaders, to develop strategies to keep America competitive in manufacturing, energy, technology and the environment. Citigroup has been under a lot of scrutiny for the way their business has been handled, irresponsible loaning and receiving so much TARP money, which has also arguably been mishandled.

In summary, Pandit told the crowd that America needs to accept the fact that tighter credit is just going to be the norm now. He says we are in a new world where borrowing will be harder, loans will be harder to get, and tighter, more expensive, credit is just going to be the case, even after the financial market has recovered. “U.S. consumption and credit creation were the two main drivers of growth. The world needs new drivers of growth — and a new business model,” Pandit told the crowd at the summit.

He said he expects loans to be more scarce and expensive. Those smaller APRs are a thing of the past in his eyes and even as recovery occurs, banks will be careful with giving out loans, almost to a fault. He also expects corporate restructuring over a number of industries. He acknowledged that Citigroup has received ample assistance from the government and praised “strong government action” for the position they are building themselves back to. He also mentioned that Citigroup has restructured its business plan, cutting costs by 25% and work force by 20% as well as lessening their dependence upon credit and consumption.

He also blamed the credit crunch on unregulated banks that he accused of being a “shadow banking system” that packaged wholesale funding into student loans, home mortgages and credit cards, a format that was responsible for over half of credit over the last five years. Pandit also blamed the “shadow banking system” for a large credit gap when that market fell apart and credit was withdrawn.

It is obvious that we are in a new age of credit with more regulations on credit cards that will cause credit issuers to implement new fees and heighten APRs and tighten up credit, at least for a time, but are we really to the point where we can no longer rely on credit? That may also backfire, because you will see less consumers worrying about their credit scores and financial institutions will lose money from lack of credit issuing. Restructure all you want, but no financial institution can rely so little on profit from borrowing that they will be able to tighten credit that much. It sounds like another one of my infamous ‘self fulfilling prophecies’, as the credit market will ‘cut off its own nose to spite its face’ and the financial institutions will forbid themselves from further growth. What do you think?