Lending freezes as anxiety grips capital markets
Credit is so tight, routine transactions have been hobbled. With interbank lending stifled, regulators are worried.
As Congress wrestles with a $700-billion plan to buy up bad mortgages, many on Wall Street say the situation in the banking system has become desperate.
Credit -- the lifeblood of the economy -- has simply stopped flowing in many parts of the financial system over the last two weeks.
"Figuratively, institutions are putting money in a mattress," said Bill Gross, the chief investment officer of money management giant Pimco in Newport Beach.
Many banks have stopped making short-term loans to other lenders. Big investors are hoarding cash, and the only IOUs some will accept are those of the U.S. Treasury. States and cities suddenly face crushingly high interest rates if they try to sell bonds to finance government operations. And for many businesses and consumers, credit is harder to get -- if it's available at all.
The root of this crisis is the housing market's collapse, but the shock waves are reaching well beyond the real estate market and are threatening to make a full-blown recession inevitable.
"If it keeps going and the authorities don't find a way to stop the contagion, it will hit the economy harder than anything we've had to absorb in decades," said Lou Crandall, chief economist at Wrightson ICAP, a research firm in Jersey City, N.J.
With nowhere else to turn, Wall Street and business executives are pressing Congress on the bailout plan, despite doubts that it will have the desired effect of quickly restoring confidence and spurring ailing financial institutions to lend again.
"Every day that it's delayed, it hurts," said John Castellani, president of the Business Roundtable, which represents large U.S. companies. "The credit markets are frozen, and the longer that happens the greater the damage to the economy."
To many Americans, the scope of the now year-old U.S. financial crisis may be evident only when it shows up in a bad reaction in the stock market. Over the last two days, the market has rallied, yet the credit situation has remained dire.
"If the Dow goes down 1,000 points, you know exactly what that means," said Michael Darda, chief economist at the investment firm MKM Partners in Greenwich, Conn.
"You'll see it on the news and in your 401(k). It's palpable and understandable. If the credit markets freeze, that hits the economy with a lag, but it's just as powerful, maybe more so."
