(Fortune) -- Meredith Whitney made her name warning Wall Street hotshots that Citigroup was in serious trouble in 2007, just ahead of the financial crisis. Zeroing in on commercial banking has long been her specialty, but in a conversation with Fortune, she inverted her gaze, focusing on how the upheaval in big banking, especially in consumer credit, is affecting America's middle class. One thing remains the same: her outlook is grim.
Just days after Wall Street rejoiced at the report that America added the most jobs in three years and the Dow flirted with the 11,000 mark, Whitney stopped by to hold forth.
Her dark view of the economy is underpinned, she said, by a problem that hasn't gone away: America, despite everything it's been through, is still overleveraged. Whitney argues that credit will -- indeed must -- continue to contract. Yanking it away from consumers is one big way this will happen.
"The lower middle class gets squeezed," says Whitney, estimating that banks and lenders will pull $2.7 trillion in outstanding credit lines by the end of 2011. "It [will be] more expensive for them to [extend credit, which] they had been doing more cheaply, through the financial system."
Whitney's warning shot in 2007 made her one of Wall Street's first analysts to see that bad lending and rating standards across America had artificially raised the U.S. homeownership rate, and that banks weren't financially prepared for the equally unprecedented rates of consumer default. "I've always loved covering the consumer, selfishly, because the data is really good," she says.
Consumer data also led her to predict continued huge reductions in credit. Here's a simplified version of Whitney's analysis: When homeownership rates jumped to 69% in 2005 from a long-term average of 64% the decade before, Whitney figured that 10% of the U.S. population had only recently gained access to the credit that allowed them to buy their houses. "And those were the guys most at risk," she says. This is precisely the class of borrowers being cut back out.
In May 2008, Whitney guessed that $2 trillion would be slashed from unused credit card lines. But six straight quarters of credit cuts later, shrinking bank balance sheets, and new credit card legislation caused Whitney to boost her estimate. "It happened a lot faster than I expected," she says.
That credit card legislation, which went into effect in February, may have been designed to protect consumers, but in a way, it's also hurting them.
For example the rule that credit card companies must give customers a 60-day warning before raising interest rates has caused particular consternation among lenders. If banks can't instantly raise rates on the customers their computers say are more likely to default, they simply stop lending en masse.
"What I worry about, despite all these noble intentions, is what these policies are doing is actually pushing down the middle class into a really unfortunate position," she says, "where it gets a lot more expensive to be poor."
What's the significance for banks and our economy? First, there will be fewer credit options for the 90% of small businesses and consumers who revolve their credit card balances at least once a year. Second, people cut out of the banking system who can't get by without credit will turn to small financial shops, including predatory lenders, and likely pay heavy fees and interest rates.