Credit Enters a Lockdown

Source: New York Times

The words coming out of Washington this week about the American financial system have been frightening. But many have raised the possibility that the Bush administration is fear-mongering to gin up support for its $700 billion bailout proposal.

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....

Read more: http://www.nytimes.com/2008/09/26/business/26assess.html?pagewanted=all

The problem is that people don't feel secure enough in their jobs to buy new cars as often as they did under the nightmare of peace and prosperity that was under Clinton.

In fact the quality of cars had increased and now people are driving their 5 and 10 year old machines, which has been killing the auto industry in America and making Michigan, especially Detroit, depressed.

of growth. I see ads all the time of car dealerships and yet I see very few new cars on the road. I see very few "30 day" temporary tags from new purchases. None of my friends, in the last 7 years, have bought a new, or even a used, car from a dealership. If I drive 10 minutes up the main street in my city, I hit what everyone here calls "car row" - about 3 miles of nothing but car dealerships. I hardly see people there. Not even window shoppers because they can do that on the internet now.

No offense to any potential car dealers here at DU, but I've always been skeptical of auto dealerships. They just scream: "scam!"s. They run these ads about financing and down payments even when financial times are bad, acting as if everyone and their brother can get a car. Many of them have credit lines for people that are as bad as these sub-prime mortgages, and have had these types of credit lines for many years.

I get spammed with more credit offers from local car dealerships than I do for credit cards or bank loans. I'd love to see some hard numbers on bad auto loans; Auto loans that are habitually late, have been refinanced multiple times or have resulted in repossession. I'm willing to bet the numbers would be outrageous.

The world could probably do with a lot less of these mega-car dealerships.

$700 billion goes along way....

When Banks need money to lend, they go thru the US gov Underwriters...

of our country. Substitute houses for railroads
A major economic reversal began in Europe and reached the United States in the fall of 1873. The signal event on this side of the Atlantic was the failure of Jay Cooke and Company, the country’s preeminent investment banking concern. The firm was the principal backer of the Northern Pacific Railroad and had handled most of the government’s wartime loans.

Cooke’s fall touched off a series of events that encompassed the entire nation. The New York Stock Exchange was closed for 10 days. Credit dried up, foreclosures were common and banks failed. Factories closed their doors, costing thousands of workers' jobs. The volume of destitute people soon overwhelmed the abilities of charities to function. Most of the major railroads failed.

The public tended to blame President Grant and Congress for mishandling the economy. The causes were much broader, however. The postwar period was one of frenetic, unregulated growth with the government playing no role in curbing abuses. More than any other single event, the extreme overbuilding of the nation’s railroad system laid the groundwork of the Panic and the depression that followed. Recovery was not realized until 1878.

In addition to the ruined fortunes of many Americans, there developed from the Panic of 1873 bitter antagonism between workers and the leaders of banking and manufacturing. This tension would erupt into the labor unrest that marked the following decades.
http://www.u-s-history.com/pages/h213.html

http://www.reuters.com/article/bondsNews/idUSNYG00131920080925?sp=true





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By John Parry

NEW YORK, Sept 25 (Reuters) - U.S. financial institutions borrowed a record $187.75 billion per day on average directly from the Federal Reserve in the latest week, showing the central bank went to extremes to keep the financial system afloat amid the biggest crisis since the Great Depression.

Federal Reserve data showed on Thursday the total amount borrowed nearly quadruples the previous record of $47.97 billion per day notched just the week before and comes as the Bush administration and U.S. lawmakers work on hammering out an agreement on a $700 billion rescue package for the financial system.

"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.

Primary credit borrowings averaged a new record $39.36 billion per day in the latest week ended Sept. 24 compared with the previous record of $21.60 billion a week ago.



The US banking system has been on a ventilator for quite awhile.


Pulling the plug will make many '(mob)family members' distraught .... But it's gonna happen.


Sooner or (not much) later it's gotta happen.:evilfrown:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNKGD.bJwmRA&refer=home

"...Advocates for a rescue plan this week point to a seizing up of credit markets, reflected in elevated inter-bank lending rates, as reason for action. Some economists are unconvinced.

``I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,'' said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory."


:shrug:

MONEY, would they?

Your name IS Shirley, right?
;)

largely out of a profitable current account and their own savings in future. The way things mostly used to be.

Debt leverage levels have been crazily overmultiplied so of course credit has to be tight as this unwinds. There has to be less debt all round, and lower consumption.

These are exigencies of the international financial system which, wounded, will need to be reformed along the lines Sarkozy suggests. Lower consumption, above all less profligate energy consumption and therefore carbon contamination, is also a prerequisite for future more environmentally sustainable economies.

The system, and everybody in it, needs to intelligently adapt to the changing circumstances.

the $2 trillion debt load of the US consumer is what's dragging down the economy.. If people cannot BUY stuff, there's no reason for other people to make it or offer it for sale...

The piper is needing to be paid, and no one's got any money..:(....plastic was substituted for real pay raises for the last 30 years, and people just can no longer keep all those plates spinning..

bail out the consumers, and everything starts moving again.. (sans plastic for all but the most credit-worthy)...people will start saving again, and the increased demand for things could spur hiring..

right now with all the foreclosures and such. But that doesn't mean that they're going to return to that sort of lending if we tax payers finance a $700 billion bailout