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Crisis rippling into economy

Used-car dealers, small manufacturers feel credit squeeze as states and cities postpone projects.

SALES DOWN: Michael (l.) and Gabriel (r.) Elmassih, owners of a car dealership in Quincy, Mass., say tighter credit is a factor.

Melanie Stetson Freeman/The Christian Science Monitor

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Brace yourself. The credit squeeze that almost every financial expert has warned about is here.

Banks are reducing credit lines and refusing to make new loans to everyone from the local used-car dealer to the office-supply store. Unable to float bonds, states, cities, and transportation authorities are postponing everything from pothole repair to airport terminal expansions. Even some students are finding that banks have tightened lending standards for private student loans – something that is particularly affecting schools that serve low-income working adults.

The key question: Can Congress end the gathering credit maelstrom by passing the $700 billion rescue plan? Or is it already too late?

"It's not too late," says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa. "But by their initial reaction, Congress made things worse. They have diluted the benefit of finally acting, and it may mean they have to do even more to stem the damage."

On Thursday, President Bush, urging the House to pass the $700 billion rescue package, said the frozen credit markets were hurting business. "They need to have money on a regular basis from their local banker," he said. "People are not lending money to our medium- and small-sized businesses."

Not everyone has felt the squeeze yet. Home buyers with good credit can still get mortgages, although it may require more footwork. The interest-rate gap between commercial bank lending and Treasury bills has eased from record levels a few days ago.

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