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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Even if the plan to buy up bad mortgage debt from troubled banks and Wall Street firm does pass, it probably won't be enough to stop the economy from getting worse than it is today.
And if the battered credit markets fail to restart, either because the bailout fails to win Congressional approval or it doesn't work as planned, the nation could be facing its worst economic downturn since the Great Depression. The current crisis caused credit markets to seize up earlier this month, almost like a car engine running without oil. And as the debate over the rescue plan's details raged, hours of negotiations among key lawmkers broke down late Thursday. |