Credit Market Loosens Up – but Not for Consumers

After a decade of easy money, an old adage about lending is coming true again: Banks only lend to those who least need help. After the U.S. Treasury sank $300 billion of taxpayer money into the banking system, a few types of loans have freed up, but the average company or consumer may find it difficult, if not impossible, to borrow in the coming months, The New York Times reports.

The good news is big companies with cash on hand are finding it easier to borrow commercial paper. “What’s commercial paper?” you may ask. Commercial paper is a promissory note that allows corporations to borrow significant sums of money, short-term, to meet their operating expenses. A key indicator of commercial paper costs, the London Interbank Offered Rate (LIBOR), dropped from 4.82 percent for three-month loans to 2.22 percent yesterday, according to bankrate.com.

But small companies, or corporations with shaky finances, cannot afford commercial paper, the Times reports.  Meanwhile, long-term loan costs continue to rise for creditworthy companies and governments. This means that even those who work for a large company have no guarantees their employer will be able to afford to pay them in the upcoming months.

In spite of the Treasury Department’s efforts, the once-huge market for bonds secured by car loans, student loans and credit card debt no longer exist, the Times reports. If banks can’t bundle and sell their debt, the amount of money they have becomes limited, leading to higher consumer loan rates.
One example is Cascade Financial, a bank in Everett Washington that lost money on investments in Fannie Mae and Freddie Mac. Before Cascade Financial extends more consumer loans, it plans to use its $39 million in taxpayer money to pay off its own debt.

“As a bank, we’d like to make prudent loans,” Lars H. Johnson, Cascade’s chief financial officer, told the Times. “If we have the capital wherewithal, we’d do that. But we have to weigh that against what’s going on in the economy.”

What to do:

-    Hunker down. Banks big and small are doing it, so the average consumer has little choice but to follow their lead. Cut out major expenses. And if your car dies, for example, consider paying cash for a beater.

-    Wait to buy big. This may seem contradictory to the above advice above, but if you’ve been preparing to buy something big – especially a house – there’s widespread speculation that the Fed may cut interest rates to zero in the coming months. We just may be coming upon the perfect time to buy.

Comments

[Bizblogged2]

Thank you for sharing useful information.The best thing to do is to take the hit, hard and fast right now, get back to real assets and then invest in a Second New Deal while we still have the capital to do it. It will be better for the entire world.

http://www.bizblogged.com/

[Jim Wiegman]

With the world being in a recession only those with AAA credit are being lent money