Unless you've lost your job in the last 12 months, the recessionary symptom that affected you most directly was the knotting of America's credit market.
Even people with good credit ratings had a more difficult time securing home and auto loans, and those able to find a lender learned that financing was more expensive. Credit card interest rates went up for many. Banks, especially big ones, became more risk-averse.
Those symptoms were merely the manifestations of a system-wide malady, which ultimately led to hedge fund collapses, bank failures and the federal takeovers of Fannie Mae and Freddie Mac. We asked Robert Dye, senior economist for PNC Financial Services Group, to explain what happened to the credit markets in 2008, and to look ahead to 2009.
Q. What the heck happened?
A. The mess really started with the subprime-related problems in the housing markets, then quickly spread. By the time it got to September, it had pretty much spread to all credit instruments. Lehman Brothers will go down as one of the seminal events; everything pretty much was frozen after that.
Q. But why did it trickle down to consumers, even those who thought they had average-to-good credit?
A. The dividing line (was) Lehman Brothers, where it created a very, very cautious mentality on the part of investment bankers. We're seeing that manifest most directly auto loans.
The (Federal Reserves') Senior Loan Officer Opinion Survey showed that credit conditions tightened dramatically in the second half of 2008, and people with relatively good credit had a difficult time getting loans. This cut the rug out from under consumer spending.
Q. Is credit really as frozen as we're making it out to be? Small and medium-size banks are still writing loans and say they are healthy.
A. Large investment banks are having a very difficult time at the end of the year. J.P. Morgan showed additional losses at year's end. Now is the time that smaller banks can gain market share by extending credit One of the goals of the Troubled Assets Relief Program was to recapitalize banks to allow them to make more loans.
Q. Why has so little worked, in terms of getting the larger banks to free up their lending?
A. One reason it is taking so long is that this recession has distinct phases. It's almost as if we've come into it backwards. (The) credit crunch would normally come at the end of the cycle, but it's at the beginning this time.
Phase two is an even more severe contraction in credit -- consumer spending took a nosedive, and manufacturing shed jobs at an alarming rate. Phase three is going to be a global recession.
Q. What aspect of the credit freeze is more damaging -- the inability of small businesses and nonfinancial corporations to get loans or the inability for some households to get loans?
A. One of the most damaging parts of the credit crunch was the increase in mortgage interest rates. The housing market was under incredible stress, and home prices were falling, but many consumers couldn't take advantage of that because interest rates were going higher. There is a pent-up demand for housing, but prospective buyers have been hesitant to jump into a market where home prices were sliding and interest rates were going up.
Q. It's harder to get car loans, and some automakers are practically giving up on leases. Is that a byproduct of the credit crisis?
A. The dramatic weakness in auto sales comes as a result of both tight credit market conditions and the weak economy. Credit was more expensive and more difficult to come by, automakers were getting squeezed and had to cut back on incentives, and consumers became increasingly stressed by job losses and falling home prices.
Q. What about credit cards? In the autumn, banks that issue credit cards were freezing credit lines and raising rates. It's bad for consumer spending, but is it a good thing for consumers?
A. It is very typical in a recessionary cycle to see "deleveraging" in households -- they shed some of the debt they are carrying. That's a good thing -- but it's a painful process at times. It will put households back on a firmer financial foundation.
Q. What will happen with mortgages and mortgage rates over the next 12 months?
A. We are already seeing lower mortgage rates as a result of recent Federal Reserve actions. They will continue to come down. I would not be surprised to see the rate for a 30-year fixed-rate mortgage below 5 percent soon. Because of lower mortgage rates and falling house prices, the amount of house you get for your money is going up.
Q. When will the credit crisis end?
A. We are expecting the recession to abate by midyear. Once the business psychology starts to shift away from a defensive mentality, toward looking at opportunity for expansion, that's when the credit markets will thaw out. That will happen very quickly once it is clear that we are back in a self-sustaining expansion.
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(Bill Toland can be reached at btoland(at)post-gazette.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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