Posted October 3, 2008
This, the shaky American economy did not need. If an imploding housing bubble and energy price superspike weren't damaging enough, our ailing financial system decided to slide into full cardiac arrest. And while the White House, Congress, and Federal Reserve have all shifted to DEFCON 1 to try to deal with the exploding credit crisis, even the perfect mix of fiscal and monetary policies seems unlikely to now prevent the worst recession in a generation. As JPMorgan Chase summed things up in a note to its clients: "The fat lady sings." The whole financial fiasco has moved far beyond liquidity problems on Wall Street. "This is the big one—the biggest financial crisis since the Great Depression," says financial historian Niall Ferguson. "It is, in fact, unlikely that even $700 billion will suffice to contain this great credit crunch we're witnessing."
Rather than being contained, the credit crisis has gone viral. Some of America's biggest companies, such as Caterpillar, McDonald's, General Electric, are now having trouble accessing the credit markets. Business borrowing has "imploded," according to Brian Bethune, an economist at Global Insight. And the longer businesses remain uncertain about the future, the more reticent they will be to hire and invest. Rising layoffs are already apparent on Main Street. New jobless claims are now running close to 500,000 weekly, a classic recession signal. But wait, there's more. Consumer loans are getting tougher to get, housing remains depressed, small businesses are experiencing the start of a capital crunch and, of course, 401(k) plans are getting walloped.
The ugly truth is that banking crises almost always come at a high cost to economic growth. And government bailouts and rescue plans usually mark the end of the beginning rather than the beginning of the end. As a Federal Reserve analysis of financial meltdowns in Sweden, Japan, and other nations concludes, "Banking crises have negative long-term effects on the economy, such as slow growth, high interest rates, and lower living standards." Just look at Japan, where a financial crisis in the 1990s led to the infamous "lost decade" of economic stagnation.
Splat! The credit crisis has landed firmly on Main Street, and here is how it is affecting all of us:
http://www.usnews.com/articles/business/economy/2008/10/03/americas-credit-catastrophe.html