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Credit squeeze's potential ripple effects

As lenders tighten standards, the possibility of a recession increases.

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Americans from Main Street to Wall Street may have to live with less debt.

Despite steeply lower short-term interest rates, banks and investors are now becoming much tougher when it comes to handing out credit cards, providing home-equity lines of credit, agreeing to lend money for corporate takeovers, and even providing money for student loans.

If this tougher scrutiny continues, economists see potential widespread ramifications for the economy:

•The tighter credit increases the possibility of a recession and makes any recovery less robust.

•If banks remain more selective in their lending, it could start to shift the roots of the economy from an emphasis on consumerism to savings.

•It may become more difficult for Americans to buy houses for investment purposes, tempering any recovery in the housing market.

•Access to higher education could become more restricted. The credit markets have already made it harder for students with a bad credit history to borrow.

"We are wringing out the excesses from the frenzied times," says Mark Zandi, chief economist at Moody's "All this is happening very quickly."

Last week, Federal Reserve Chairman Ben Bernanke told Congress that the central bank's most recent survey of senior loan officers at large banks found further tightening of loan standards. "Credit that is more expensive and less available is a restraint on our economic growth," stated Mr. Bernanke in his testimony before the Senate Banking Committee.


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