Crisis rippling into economy

Brace yourself. The credit squeeze that almost every financial expert has warned about is here.

Banks are reducing credit lines and refusing to make new loans to everyone from the local used-car dealer to the office-supply store. Unable to float bonds, states, cities, and transportation authorities are postponing everything from pothole repair to airport terminal expansions. Even some students are finding that banks have tightened lending standards for private student loans – something that is particularly affecting schools that serve low-income working adults.

The key question: Can Congress end the gathering credit maelstrom by passing the $700 billion rescue plan? Or is it already too late?

"It's not too late," says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa. "But by their initial reaction, Congress made things worse. They have diluted the benefit of finally acting, and it may mean they have to do even more to stem the damage."

On Thursday, President Bush, urging the House to pass the $700 billion rescue package, said the frozen credit markets were hurting business. "They need to have money on a regular basis from their local banker," he said. "People are not lending money to our medium- and small-sized businesses."

Not everyone has felt the squeeze yet. Home buyers with good credit can still get mortgages, although it may require more footwork. The interest-rate gap between commercial bank lending and Treasury bills has eased from record levels a few days ago.

"The damage is not repaired by any stretch, and the markets are wise to hold back on a positive reaction to the Senate passing the rescue bill," says Bob Brusca of Fact & Opinion Economics in New York. "But the economic data is so terrible, the economy looks decisively in a recession, and the market has to deal with that."

Business leaders report the tightening credit milieu is becoming increasingly widespread. "It's more difficult to get a car loan, more difficult to buy large appliances, for small business to finance their purchasing," says John Castellani, president of the Business Roundtable, a Washington association of 160 CEOs of leading US companies.

The auto industry is especially feeling the crunch, with sales falling an average of 27 percent in September. Two states that are particularly hard hit: Florida and California, where buyers are used to tapping home equity lines to finance their vehicles.

Nationally, only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago, says Art Spinella, president of CNW Marketing Research in Bandon, Ore. "It's not that they are bad loans. It's just that no one knows used-car pricing.

The crunch is particularly difficult, he says, for independent auto dealers and used-car dealers. In September alone, he says, nearly 1,000 independents or used-car dealers closed their doors in the US. "They can't get their customers an auto loan," he says.

That's the experience of Gabriel and Michael Elmassih, who own four-month-old Quincy (Mass.) International Auto Sales, which sells used cars. "We probably lost 10 deals in a month because the banks don't approve the car loans," says Gabriel Elmassih.

Credit woes are spreading fairly quickly to the small-business community. In a survey completed in early September, the National Small Business Association found that 32 percent of its members reported worsening bank-loan terms, up from 27 percent in February.

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