9.25.2008

The danger of a downward spiral of credit lockdown


Credit Enters a Lockdown

Excerpt:

In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity.

“Loans are basically frozen due to the credit crisis,” said Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo. “The banks just are not lending.”

With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.

Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.

Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.

“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.”


Comment: One may think that they are immune .... but you probably are not. If you have a 401K plan, are an investor, have a credit card, have a student loan, work for a company, etc. ... it impacts us all!

Update: The credit crunch: Loans out of reach

At larger institutions, such as the San Francisco-based Bank of the West, which has approximately 700 branches mostly west of the Mississippi River, consumers need a better credit score than they did before the credit crunch hit.

"We have seen a change in the landscape and responded to it," said Bruce Heysse, an executive vice president for Bank of the West's consumer lending business.

Consumers whose credit rating teeters between 'good' and 'not so great' are the ones getting squeezed the most, added Carole Merchant, a fellow Bank of the West executive vice president in the company's indirect lending business.

"Will loans be available for people who have some sort of credit blemish? That will probably remain more difficult," said Merchant.

Given the current state of the economy, banks such as the San Antonio, Texas-based Cullen/Frost (CFR), have been forced to withdraw lines of credit from some customers.

Still, the lending spigot hasn't been completely shut off. Instead, Dick Evans, chairman and CEO of Cullen/Frost, said that his bank is charging customers higher rates for loans than they did before.

"We have tightened from the standpoint that we get paid for the risk," said Evans, whose bank focuses primarily on business lending and had more than $13 billion in assets as of the end of last year.


Comment: The above seems like a good thing!

1 comment:

  1. More or less, what the bailout advocates are saying is that without issuing a lot of loans to poor credit risks, our economy is hosed.

    Which, of course, means that our economy is hosed, as issuing loans to bad credit risks is bound to produce a new round of defaults.

    ReplyDelete

Any anonymous comments with links will be rejected. Please do not comment off-topic