The credit crunch is showing up in many ways. Even if mortgage money is available fewer are applying for it.
In yet another sign of the economic crisis, the Mortgage Bankers Association said Wednesday that mortgage applications plunged 23% last week.
Things are tanking across the board. Some people are skeptical about the severity of the crisis. I think they aren't paying close enough attention.
Not only are banks afraid to extend credit. People are increasingly fearful about taking on debt.
As long as the constant drumbeat of bad economic reports continues, consumers and businesses may not be so eager to borrow money anyway even if banks start extending more credit. Friday's dismal jobs report, showing that 159,000 people lost their livelihoods, did little to inspire people to spend.
"You tell me I can have the credit, but I don't want it," said Amiyatosh Purnanandam, assistant professor of finance at the University of Michigan. "If people are not going to buy cars whether they can get credit or not, it's not going to help the economy."
“If history is any indicator, there should be an equivalent surge in credit-card charge-offs very soon,” he said. “We forecast first quarter credit-card charge-offs will be $18.6-billion (U.S.) and that the total 2009 charge-off bill will add up to $96-billion.”
Laura Nishikawa, Innovest's consumer finance analyst, said the credit card issuers that will be hurt least in the coming crunch will be those who had the “foresight” to improve their risk management performance during the bull market, even if they sacrificed some growth in the process.
The survey revealed that 37% of banks have increased rates, compared to 24% in April and 10% in January. They may be raising rates to compensate for losses. Advanta saw an 83% decrease in earnings in its second quarter, due in large to provisions for credit charge-offs. Capital One's profits dropped 40% and American Express saw a 38% decrease. And while Bank of America's 41% dip in earnings beat estimates, the company incurred $2.75 billion in credit card losses 31% more than last year.
Think you are immune? Maybe. Even Silicon Valley is not immune to the credit crunch.
Yet nonstop economic gloom in other parts of the economy seems to have frayed the nerves of even the Valley’s most sublimely confident. Discussions of the economic crisis dominate conversations. Technology blogs offer prescriptions for riding out the crisis and intense debates over what percentage of start-ups are destined to fail.
According to a quarterly survey by Mark V. Cannice, director of the University of San Francisco Entrepreneurship Program, the confidence of venture capitalists has plummeted to the lowest level since the survey began in 2004.
“Everyone is worried about their budgets and everyone is worried about the economy,” said Jayant Kadambi, founder of Yume, a three-year-old online video advertising firm. “These are the conversations we have these days.”
"It is daunting that California, the eighth-largest economy in the world, cannot obtain financing in the normal course of its business to bridge our annual lag between expenditures and revenues," Gov. Arnold Schwarzenegger wrote in a letter to the state's congressional delegation in Washington.
California is swiftly running out of time to float $7 billion worth of short-term debt needed to pay workers and bills as early as next month, state Treasurer Bill Lockyer warned in his own letter.
Car dealers are having a hard time getting credit for borrowers. They are also having a harder time getting credit to buy cars to put on their lots.
Autos. Many analysts hoped that car sales would pick up from summer lows, now that gas prices have drifted back below the $4 threshold that spooked buyers. But sales in September were the weakest in 15 years—and the credit crunch is now the main culprit. "The scarcity of credit has forced sales into freefall," Credit Suisse analyst Chris Ceraso explained to investors. "Volatility and uncertainty on Wall Street [has] spread to Main Street, leaving consumers paralyzed."
Dealerships report that "subprime" borrowers with marginal credit ratings essentially can't get loans. Some "prime" borrowers are being shut out, too. At some dealers, loan approvals are down 50 percent. And most homeowners can forget about using a home equity loan to help finance a car—since home equity has been plunging, and those loans drying up, too.
In a typical growth year, America loses 75 to 150 dealerships, so some contraction is normal even in the best of times, said Paul Taylor. an economist with the National Automobile Dealers Association. But this year, there could be 500 to 700 fewer auto dealerships by the end of the year, he said .
On the webcast Roubini accepted that the Paulson plan was about to become law, but dismissed it as less than a sticking plaster. Roubini said the financial system would remain “literally at the point of systemic collapse”. He said that only by “doing something even more radical” than not only the Paulson plan, but all steps taken so far, could a global domino effect of failing banks be averted.
Roubini’s thesis is that there is now a “silent run” hitting the world’s banks. There may be no Northern Rock-like queues of retail depositors standing outside bank branches.
We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.
Over the past decade, consumers in Britain have accumulated debts, including their mortgages, worth on average 180 per cent of their disposable income, the highest proportion of any country in the G7 club of rich nations. It adds up to a mountainous £1.44 trillion of personal debt - and economic experts have been warning for several years that it would end in tears.
Ever since the credit crisis struck Britain's banks a year ago, they have been pushing up the cost of loans, especially for riskier borrowers, such as those who want to borrow a large multiple of their salary, or a have a poor credit record.
The rapid drainage of credit out of the economy has intensified as one bank after another has collapsed or been rescued. The Halifax - whose owner ,HBOS, was swallowed up by Lloyds TSB in a government-brokered rescue three weeks ago - announced this weekend that it is withdrawing many of its mortgage deals from the market and ratcheting up the interest rates on others. The cost of other loans, from credit cards to the car deals on showroom forecourts, is rising, too. The days of cheap credit are over. At the same time, falling property prices are making homeowners feel poorer.
|Share |||By Randall Parker at 2008 October 04 09:55 PM Economics Credit|