Ripple effects of Wall Street meltdown felt far and wide

Washington Post

WASHINGTON — Credit for consumers and companies alike was choking to a halt as the crisis on Wall Street intensified last week. But when word of a government bailout for financial institutions came this weekend, credit freed up — albeit under tighter rules.

Despite that heartening sign for the creditworthy, the economy remains fragile with consumer confidence flagging, spending down and unemployment at its highest level in five years. The turmoil on Wall Street could further slow spending, the economy’s key engine.

Economists said the more stringent credit standards would be the most immediate impact of the financial crisis for businesses and consumers. Those with the weakest credit ratings and most questionable assets are likely to find loans more expensive and harder to get, while those deemed good credit risks could be largely unaffected.

The fallout from the financial crisis caused by the collapse of the housing market has slowly rippled outward. Since early this year, long before the dramatic developments of the last few weeks, Federal Reserve surveys of loan officers found that a majority of the nation’s banks had tightened lending standards for a broad range of loans, slowing an economy that had expanded in recent years with the help of an increasing volume of borrowed money.

“The economy cannot regain its stride until the credit crunch passes,” said Greg McBride, a senior financial analyst at Bankrate.com.

The availability of credit is pivotal, as it propels a good share of the consumer spending that accounts for about 70 percent of the nation’s economic activity. “The real fear here is that the turmoil could affect credit costs, which could affect borrowing and spending in the real economy,” said Mark Gertler, a New York University economist.

As the crisis boiled earlier this week, some corporations found that their short-term borrowing costs suddenly soared, in some cases by as much as 40 percent. But as the crisis continued, some highly rated firms found it cheaper to raise money because investors sought to put their money in the safest investments they could find.

By the weekend, the overall cost of short-term borrowing for companies began to ease. “The good news is if you had not seen the reversal in borrowing costs over the past two days, you would have seen things like mortgage rates going up,” and economic activity slowing sharply, said Jim DeMasi, strategist for Stifel Nicolaus, an investment banking firm. “The government action has provided some stability and has the potential to turn around a lot of negative trends.”

Even before the financial crisis intensified, shoppers had been feeling squeezed by falling home values and rising costs of necessities such as food and fuel.

Thousands of financial industry jobs have disappeared, remaking the face of Wall Street.

Though the credit crisis has been building for months, it has at times hit consumers with jarring abruptness.

Students who were approved for private school loans from College Door in Carlisle, Pa., which was backed by Lehman Brothers, learned several weeks ago that their loans would not be funded. Private student loan companies had been struggling for months as it became more difficult to sell loans and to borrow money to make them. A total of 33 lenders, including MyRichUncle and Wachovia, have suspended private student loan programs, said financial aid expert Mark Kantrowitz.

Also, millions of credit card users have had their credit limits sharply reduced.