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Credit Crunch Turns Into Credit FreezePublished 09/26/08 Dustin Ensinger - Print ArticleE-mail - editor@economyincisis.org The credit crunch has turned into the credit freeze. With the government’s $700 bailout package in limbo due to partisan bickering, the credit market has come to a standstill. Banks are increasingly hesitant in lending to one another, which is having a trickle down effect on average consumers. Eager to clear their balance sheets of troubled assets, banks are taking fewer and fewer risks. If the Wall Street meltdown remains unresolved many Americans will find it difficult to obtain financing for a home, vehicle, college education or a new small business. Cash-flow problems could also prevent many businesses from making payroll, thus sending more workers to the unemployment line. "Credit is the mother's milk of the modern economy. The tighter the credit spigot closes, the worse the economy is going to be," said Mark Zandi, chief economist of Moody's Economy.com. "Businesses operate on credit. If they can't raise money, then very soon they won't be making payroll." Banks continue to be concerned that if a deal is not reached the credit market will not unfreeze anytime soon. Experts say that if that happens unemployment is likely to shoot to over 10 percent, and Gross Domestic Product will fall at a rate of two to four percent annually. Many believe that in this scenario the market may not recover until 2010 at the earliest. Others disagree, saying that banks will use the bailout money to fix their battered balance sheets before they even consider lending more freely. Another common critique of the plan is that it will do nothing to address the root cause of the problem: plummeting home values. Source CNNMoney.com:
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FIRST, the U.S. treasury should create a central credit clearing house that would approve all future personal and business loan applications submitted to them form banks and lending institutions. These would be loans for automobiles, homes, furniture, education, etc. For folks who need to borrow to buy these items. There would also be applications for business loans to increase inventories, hire new employees, expand business, etc.
When those applications are approved they would be returned to the banks and lending companies with a loan guarantee document that would backup the loans against defaults. This would promote confidence in the lending of money again because there would be no worry that the loan(s) would not be repaid. Business would again flourish, people would once again be buying cars, clothing, appliances. etc. The companies that sell these goods would again make money, hire more people who would again be making money to spend buying other goods, paying their bills, paying taxes on their incomes and sales taxes too. Everyone would benefit from this process. Additionally, more government jobs would open up in the new government credit clearing house. It’s a win-win situation.
THE SECOND Suggestion would have to do with reit’s and other securities and funds that contain "packaged" mortgages. This practice should and must be stopped until these mortgages are first cleared through the aforementioned U.S. Credit Clearing House. If investment firms has had this process in place before everything recently hit the fan with "sub-prime" mortgages, we would not be in the situation we are now in.
When I purchased my first house back in 1967 the bank from which I received and approved my first mortgage also serviced my mortgage along with all the other mortgages they sold. There were no reits and no selling of mortgages as securities or for that matter, no "sub-prime" mortgages. If you didn’t qualify for a mortgage, you didn’t get one, PERIOD. Old-fashioned common sense business practices. Perhaps our current business transactions should take a lesson from their counterparts of a different generation. I hope that these suggestions are given serious consideration for I truly believe that if implemented correctly they will work.
Thank you for your attention. I respectfully request a reply with your thoughts and comments on this matter.
Sincerely,
JOHN A. MEDICI
(Phone number removed by EIC)