How the Credit Crisis is Spreading from Wall St. to Main St.

Yesterday the New York Times published a front-page story written by the National Economic Affairs reporter Peter Goodman titled Worried Banks Sharply Reduce Business Loans. Peter is a friend of mine who I believe is a truly gifted reporter. Peter wrote:

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

Peter’s reporting about Wall Street hurting Main Street is a problem that tens of millions of Americans cope with every day. Entire communities and industries are being turned into economic “road kill” as banks “deleverage” by cutting off credit to both healthy and unhealthy borrowers. Examples of the walking wounded include

• All industries related to residential real estate and everyone who lives in a home. Home sales are being hurt by a lack of mortgage financing for purchasers. Even if purchasers have equity, income and good credit, i.e., they are ready, willing and able to purchase a home, in some regions of the country very little mortgage financing is available. Everyone associated with residential real estate, which means every American other than the homeless, and most people with jobs are being hurt.
• The domestic auto industry and everyone who wants to purchase a new or used car. Chrysler’s inability to continue to provide lease financing is the most recent large failure of Wall Street to finance Main Street. While Chrysler’s issues are somewhat unique, many banks and other non-OEM lenders are doing less consumer automobile financing and leasing. Because the capital markets are increasingly reluctant to purchase bonds collateralized by auto loans and leases, I think that GM and Ford aren’t far behind Chrysler in announcing financing program “changes”. Without new and used car financing, the domestic automobile industry will grind to a halt as sales plummet. Everyone who drives or is associated with the domestic auto industry is being hurt.
• College students and colleges and universities. The privately funded student loan industry is in bad shape and getting worse. On July 18 I published a blog article on this topic titled Private Student Loans - The Fall Surprise for More Than 1 Million Students. Everyone associated with higher education is being hurt.
• RV manufacturers, pleasure boat manufacturers, associated dealers and supporting businesses and their employees. Given the United States economic problems, the power leisure industries don’t get a lot of sympathy. However, for hundreds of thousands of workers the lack of financing for RV and boat purchases is ripping the guts out of an industry that should be merely hurting from high fuel prices. In the middle of April I was on FOX Business Network discussing these industries in a series of segments that included interviews with industry CEOs and representatives. Since then things have gotten worse and the entire industry is watching itself be economically run over and left for dead.

And the list goes on and on and on.

The failure of Wall Street to provide liquidity to Main Street is the inevitable consequence of shrinking real money supply caused by the deleveraging of banks and other lenders. This week I pointed out that according to the Federal Reserve, M2 was actually slightly smaller in the week ending July 24 than it was during the week ending March 24. Shrinking real money supply (i.e., the rate of growth in money supply less the inflation rate) is bad and will sooner or later drive the entire economy into a ditch.

Money supply is the grease the makes our economic engine run. Without a stable real money supply we are destined to repeat the most severe economic mistakes of the last Century.

Fortunately, Ben Bernanke has studied economic history and is determined not to make the same mistakes as the Hoover Administration. Obviously I hope he is successful. The nation’s economic health depends on it.

Disclosure: I own shares of GM. 

Comments

[HARM:]

I'm having a tough time reconciling the facts being reported here (credit is contracting in many sectors of the economy) with the conclusions being drawn (deleveraging is "bad" for all consumers, even "healthy" borrowers, communities are somehow becoming “road kill”).

We have just been throught the largest debt-fueled orgy in our nation's (and possibly the world's) history and a double-bubble (Dot.com & Housing). As a result, markets are now going through the entirely predicatable --and healthy-- process of deleverage. Bad loans, uncreditworthy borrowers and reckless lenders are being flushed out of the system (as they should be). Asset prices --houses especially-- are falling back down to sane price levels, supported by fundamentals like rents and incomes (as they should be).

So... how is this a "bad" thing for the non-reckless and prudent? Does my idiot neighbor's inability to continue his debt-binge "lifestyle" of forever spending beyond his means via the home ATM harm me in any way (aside from the inevitable government bailouts his kind will try to stick me with)?

It sounds like the author must work in a securities related field, one that generates lots of fees and commissions from originating and selling tons of bad financial paper. Hmmm.... Let's check: seekingalpha.com/autho...

"Mark Sunshine is the President of First Capital and the President and CEO of Siemens First Capital.

...Mr. Sunshine is a regular guest commentator on FOX Business Network and has also appeared on CNBC."

Makes perfect sense now!

2008 Jul 29 02:20 PM

[HARM:]

CAREFUL what you wish for, people! If morons can no longer buy million-dollar condos with neg-am loans, we're all doomed...DOOOOOMED, I tell you!!

LOL

2008 Jul 29 02:22 PM

[Larry House:]

The only way our government (and many Americans) will live within their means is if they are forced to. It hurts. The baby bottle of easy money is running dry! We already as a nation have a pile of debt that will never be paid (at least not with dollars that are worth anything). We HAVE to go through this process, and hopefully, we will be the better for it in the long run. I reject the idea that ALL homeowners are "walking wounded" right now. Not everyone owes more than the place is worth or needs to sell right. Also, many of the industries you mention are certainly not necessities. That is why the streets of my town are dotted with trucks, SUVs, motorcycles, boats, campers, etc. for sale. Many of those purchasers got in over their heads because of easy money. It is about time this stopped. Americans are groomed from birth to do one thing--CONSUME! And don't let not having the money stop you. You can get it! We have to have a return to sanity in this country. We must save more money. I think it was the Roman philosopher Seneca who said "a man is measured not by what he has but by what he can live without."

2008 Jul 29 02:52 PM

[Jason Rines...:]

Good points. Only disagreement I have with you HARM is that it will effect you when your neighbors pack up and foreclose. The property is not maintained and perhaps your neighbors decide to sell drugs or do other unsavory things to your family that they may not normally do.

Now, if your in a gated community with security, good for you. It means you probably earned your right to a better life. However, you may not want to be so obtuse and contribute to changing the political landscape of irresponsibility. We can all continue to invest and innovate but recent pain has forced me to consider wealth preservation instead of capital expansion.

This effected me this way and I am quantifying some of the writers point:

In June of 2007, my bank could not increase my LOC, despite profitable venture, in the right space, 7 years of loans repaid, seldom late and always paid in full. This regional bank underwriter was kind enough to share with me this was more then a credit crisis, it was a solvency crisis. My company was Digital meaning there was not enough hard assets to secure the loan. What changed? Was I irresponsible? NO! The company ran on fundamentals and had adequate capital and access to it that vaporized. I could have went to other banks but After doing much more economic research, historic and number crunching, I came out to a $8 trillion total loss of this whole debacle. People here emailed me afterwards and I shared the analysis. But some of you are so obtuse and ignorant it is beyond mind boggling.

You can see my comments from 2007. I was sneered at a bit, but I did what any responsible CEO and investor would do. Management all kicked ass and worked 14 hour days in preperation and created a solid cash cushion. Glad I didn't call my other junior managers irresponsible for buying a new Caravan with there take on profits.

Now we work 14 hour days to retain profits. I bailed on Higher Ed marketing and had mainstream clients such as Apollo and CEC ( see Local Schools . com) in March of 2007. So yes, is there a silver lining for acting responsibly?

Yes, I am already making money and selling off the Health business for sizable seven figure profit going into my pocket. However, my family will never get back the 13-20 hours a days for the last 14 months and the next 6. I guess I am a whiner like Phil Gramm thinks, right? How dare I complain about 3% of my entire life working for someone elses scams in DC and NYC?!?!

Now, for the stupid amateur investor and the institutional investor/trader who lost there shirts on this market manipulation - TOUGH TOMATOES, you had time to educate enough to take all the risk and reap all the rewards or failures.

But my colleagues all are begging me for money, not for vacations or anything else. I am lending to the responsible of those families and they are EASY to spot. Who is government lending to? The selfish and irresponsible, again and again and again. The bailout of consumers? Erased in monetary policy.

Many of these people lose jobs, have a medical injury, never bought McMansions or went on three week jungle safaris. Minorities were pandered to and got loans they could never repay. It's called politics, a little trick invented in FDR's day.

Main St. is dragging down Wall St. It was predictable but cause and effect is this: Corrupt government + lack of oversight = economic disaster. Perhaps if my some of the decent, hard working families I know had access to a supercomputer and had the luxury of spending two years in the VC community, perhaps they would have fared better. What dummies, eh HARM. Add some compassion to your black and white, if you don't help fix it you will not have a long-term future of much enjoyment in America you fought to earn. I guess if your family likes faraway places that is OK. But that is NOT OK to me.

2008 Jul 29 10:27 PM

[cocomurph:]

Just yesterday, as I left my local bank, the manger stopped me in the parking lot, almost begging for "new money" deposits...not so he could make new loans, but in order to help shore up his regional mega-bank's balance sheet.

2008 Jul 30 08:31 AM

[notsosmart:]

mr think big cant even spell right.lol

2008 Jul 30 10:30 AM

[HARM:]

I don't quite get what point you're trying to make here, Mr iThinkBig.

On the one hand, you bemoan my lack of "compassion" (for speculators? supposedly blameless, innocent victims?). On the other hand, you appear to partially agree with me, then change the subject and accuse me of *supporting* corrupt government policies that encourages and subsidizes speculation.

Let me be clear, just for the record (so no one else puts words into my mouth):

--I HATE current government laizzese-faire no-oversight policy with respect to the REIC and banksters.

--I HATE government bailouts for Wall Street and speculators, and will never vote for a politician that supports them.

--I don't "like" the fact we had a massive bubble, but there was zip I could do about it. The PTB engineered it, and now the end game is to either try propping up the market with taxpayer bailouts (which will just delay the inevitable outcome, Japan-style), or let the market take it's course and punish the greedy and stupid, then get back to a sustainable path quickly (my preference).

--There are plenty of "innocent victims" in this mess: responsible taxpayers, savers, renters, homeowners that didn't HELOC and serially refi, people who just wanted a house as *shelter*, not to play like a slot machine. Speculators, crooked mortgage brokers and banksters are not among them.

Oh... and I also don't buy your BS assertion that responsible "decent, hard working families" no longer have access to credit --ridiculous. Banks are in the business of loaning money for a profit. They either keep doing it or they have no reason to exist. Even in a recession, they will still make loans. The key difference is, now they may actually *care* about whether the borrower has a chance of paying it back. That is *not* a bad thing for creditworthy, responsible borrowers, it's a GREAT thing.

2008 Jul 30 02:06 PM

[juicyjoo:]

amen to that brother.

2008 Jul 30 04:10 PM

[Muzie:]

What THE HELL is iThinkBig blabbering about??

Maybe he thinks a little bit too big.

2008 Jul 31 12:04 AM