Everyday borrowers face even stiffer credit

The latest outgrowth of the housing crisis, the meltdown on Wall Street, threatens to gradually corrode economic activity on Main Street, mainly by disabling the credit on which so many everyday transactions depend – but also by frightening people.

Lenders of all types had already been raising the bar for borrowers, turning away all but the most stellar customers. This week, lenders became even less willing to part with their money, further crimping budgets and pocketbooks.

An economy fueled by easy credit for more than a decade is fraying.

The credit shock is in some ways reminiscent of the 1973 oil embargo, which “came into people's lives right away,” said Andrew Kohut, director of the Pew Research Center, the public opinion pollster. Then, Americans were forced to line up for gasoline and turn down their thermostats in winter.

Though less visible, the credit squeeze, if it persists, will force businesses and consumers to cut spending.

“We have moved into a decline in consumer spending, which normally happens only in a major recession,” said Ethan Harris, chief domestic economist at Lehman Brothers. He calls the experience “a slow-motion recession in which economic growth will be near zero for an extended period of time.”

Consumer spending accounts for two-thirds of American economic activity and has been slowing as the value of homes falls. In June and July, it grew only because consumers paid more for the same goods. After factoring in higher prices, consumers actually bought less.

Borrowers find that the nation's lenders are tightening up in numerous ways.

American Express, for example, is reducing the maximum credit limit for half of its millions of cardholders. After several banks said they would not lend the purchase price, a tractor-trailer dealer in North Carolina had to cut the $20,000 asking price for a secondhand tractor to $14,000. And a commercial real estate agent, trying to raise $4 million by refinancing an apartment building, got only half that amount from the Bank of Smithtown on Long Island, even though the building was appraised for $10 million.

“With marginal lenders in trouble, we have more people than ever coming to us for loans,” said Brad Rock, chairman of the Smithtown bank and of the American Bankers Association. “So all of a sudden we can be much pickier in deciding what loans to make and how much to lend.”

Being pickier means that an American Express cardholder whose maximum has been reduced to $1,000 from $1,200 has that much less to spend on clothing or meals out, purchases that lift the economy.

At $14,000 for a used tractor, a trucker lacks a sufficient down-payment for a new one, which costs more than $100,000. So he seeks other work, even as job seekers across the nation outnumber job openings by more than 2-1, the biggest mismatch since 2004, the Bureau of Labor Statistics reports.

And the commercial realtor is shy $2 million that would have been invested in a new venture to generate economic growth.

Rock, the Smithtown banker and chairman of the American Bankers Association, with 8,400 affiliates, does not see a problem in this turn of events.

“Now people are going to actually have to have a job to get a loan and they are going to have to make installment payments that are already higher per dollar borrowed than they used to be,” he said, arguing that the debt-fueled prosperity of the bubble years was unsustainable.

But there is not, for the moment, an adequate replacement for the sagging economy.

Henry Kaufman, the Wall Street economist, ticks off the alternatives and discounts them. Exports could carry some of the load, but the surge in the first half of the year is fading as European and Asian economies weaken.

Here at home, capital spending by business on new buildings and equipment could provide a lift, but that, too, is beginning to fade as corporate profits – and demand – weaken. Just Wednesday, FedEx announced that profits had shrunk in the latest quarter as freight traffic declined.

Home construction is off the table, of course, as a means of lifting the economy. That leaves government, which could inject money into the economy through aid to the states or infrastructure spending or another round of tax rebates.

There is even talk of a bigger bailout for the housing market, akin to the Resolution Trust Corp. of the savings and loan crisis.

Meanwhile, the barriers to borrowing go up.

By late summer, a majority of the nation's lenders had tightened standards for every type of credit, the Federal Reserve's bank surveys show. Home equity lines of credit have been canceled or reduced as home prices have fallen. Credit card companies are imposing higher delinquency fees, stepping up collection efforts and checking on repayment histories.

“More and more, they don't give the card if you don't have a good credit record,” Harris said.