McClatchy: Rescue package aside, economy faces deep challenges

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Rescue package aside, economy faces deep challenges

By Kevin G. Hall | McClatchy Newspapers


WASHINGTON — The congressional compromise drafted over the weekend to rescue Wall Street, assuming it wins approval, is expected to fend off a potential meltdown of financial markets for now. But it won't cure much of what ails the struggling U.S. economy.

Many economists believe the U.S. economy is in recession, or so close to it that it's almost an academic question. The weekend compromise in Congress doesn't fix that, but it prevents things from getting worse by calming the jittery credit markets, which are vital to the ability of corporate America to fund itself through issuance of short-term debt.

Finance is something that happens in the background, like the fan belt on an automobile's engine, a whirring that goes unnoticed over the sound of the road. Everything runs with the help of these credit markets, and when they stop working, as they did on Sept. 17, it gets attention quickly.

"People watch the stock market, but that is not the key here. The credit markets are the key," said David Wyss, chief economist for the rating agency Standard & Poors in New York.

In recent weeks, hotel and other big construction projects have ground to a halt as financing suddenly went dry, and automobile finance companies have suddenly found it hard to lend. Credit markets reflect an important intersection between Wall Street and Main Street.

If credit markets respond positively this week, the spread, or gap, between the interest on Treasury debt -- the safest place to lend money -- and other lending rates will narrow. This widening gap has hurt corporate America's ability to conduct needed short-term borrowing except at extremely high rates.

If this spread narrows, the problems of the past 10 days may be just a blip on the charts that make up a historical record of the American economy. If these markets remain in turmoil, there could be even more bank failures, and a fast accelerating economic slowdown.

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