Easy Money Drying Up, Taking The Economy With It?

What happens when easy credit, the lifeblood of our economy for the past few years, dries up? Consumer spending slows and people start mouthing the word “recession.”

The Washington Post says:

Easy credit has been the economy’s lifeblood in recent years. It gave people who previously couldn’t afford homes a crack at the American dream. It fueled multibillion-dollar takeovers of some of corporate America’s biggest names. It buoyed the stock market and propped up the prices of many other assets.

But now, the investors who a few months ago were willing to lend money to Wall Street at low interest rates, on loose terms, are balking as they worry about having to pay the price for lax lending standards.

The trouble started in one of the shakiest sectors of finance, home mortgages for people with bad credit, but it is spreading. As easy credit dries up, some huge corporate deals are being delayed and could unravel.

The question now is how far will the pain spread, and how many people will get hurt as it does.

“When people get scared, they tighten up all over,” said A. Gary Shilling, president of the investment firm that bears his name. He said he expects housing prices to fall significantly further. “This kills consumer spending,” he said of the credit crunch. “We think we’ll be in a recession as a result by the end of the year. And that will spread globally because U.S. consumers still are the buyers of first and last resort for the excess goods and services produced around the world.”

We love optimists.

Easy Money, Lifeblood Of Economy, Is Drying Up [Washington Post]
(Photo:Meghann Marco)

Comments

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  1. B says:

    Why do we think easy money is going to dry up? As long as China has money they need to invest, they’ll invest it in our markets, which is the source of all that easy credit in the first place.

  2. polarogak says:

    I, for one, look forward to a world in which my 18-year-old little sister can’t get a Capital One card with a $2,000 line of credit.

  3. hoo_foot says:

    One criticism I had with this article was that it completely neglected to mention the role of personal responsibility. The banks should rightfully be criticized for predatory lending, however, the idiots who thought they could afford a McMansion on minimum wage deserve just as much ridicule.

  4. zolielo says:

    @B: China can only fool the world for so long about their money valuation problems.

  5. Crazytree says:

    imagine subprime homeowners as a puppy in a 50-gallon drum.

    now imagine loan payments as a steady stream of water into the drum.

    now the puppy is going to be able to keep up with the stream of water for some time… but as that stream “adjusts” upwards… eventually the puppy will drown.

    drowning puppies = bad for the economy.

  6. CumaeanSibyl says:

    @hoo_foot: At this point, though, isn’t that a given? I think people have that pretty well figured out even if the news doesn’t make it explicit every time they do a story on debt.

    It’s like with gun control, or drug laws: people disagree on how much control is necessary, but they all pretty much agree that misusing those things is a bad idea. It’s just a matter of how easy you want it to be for people to OD on heroin, shoot themselves, or, in this case, spend themselves into bankruptcy.

  7. humphrmi says:

    Credit isn’t the only driver of the economy, however it has been one of the drivers recently. The stock market can sustain it’s growth without credit – that is, without megamergers and the other business activities that easy credit provides – because P/E ratios for many sectors are still at historic lows.

    I’m not giving financial advise here. All I’m saying is, once this “correction” plays out, there’s still a lot of potential bull left in this market. And we’ve never had a recession in a bull market.

  8. G-Dog says:

    I feel good knowing my wife and I caught our spending when we did. We buy ghetto brand food, never eat out, and make due with what we already have. Every week it seems like we pay off another credit card or bill of some sort. We have super basic cable, entry level DSL, and every other service is at a bare minimum. I even settle for bottom shelf Rum, it’s quite a sacrifice, but I make due.

    For example, I’m currently drunk!

  9. Rusted says:

    I’m all for it. Time there was some economic Darwinism. The ones that survive will be very strong indeed.

  10. synergy says:

    Economists have been saying this for years. Supposedly there will be a real downturn, I think, in October if not December if I remember correctly.

  11. synergy says:

    I suggest reading “American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century” by Kevin Phillips.

  12. snowferret says:

    @hoo_foot:
    I think the moral of the story here is that everyone’s stupid. Very very stupid…

  13. snowferret says:

    @Crazytree:
    You make baby jesus cry…

  14. andrewsmash says:

    You mean the economy actually has limits based on the real world? Someone should let all of the MBA’s know this. Every time I hear how shocked people are at the fact that limitless credit leads to a top-heavy system which can collapse under the slightest pressure, it just makes me sad. Remember wild cat banks, the savings and loan scandal? When money is given to people without making sure they can it pay it back, the whole system suffers. Of course, one or two people get rich, so to some, that makes it all worthwhile.

  15. tz says:

    Although you might think it is heresy, Ron Paul has suggested eliminiating the Federal Reserve. The problem is easy credit is addictive – and much like stimulants where you can stay awake two weeks, when you stop, you are asleep to make it up. If not dead.

    Credit is like crack – you feel good although you are destroying instead of taking care of your body. It can be a useful tool, but as the generally unknown economist Hyman Minsky pointed out, stability creates instability, as people keep making larger bets based on the apparent stability – it has been likened to one person jumping on a frozen lake and since he can do it more people join in.

    And to discredit another theory, if you invested in Japan’s Nikkei 225 index on the first day in 1989, your stock market gains over the 27 years so far would have been…