Crisis rippling into economy

In Portland, Ore., Michael Mathison, production manager of Gango Editions, an art publisher, can attest to the new banking climate. His local bank now looks more closely at his books, including his accounts receivable, which he uses as part of his borrowing base. "They are now saying anything 90 days [past due] we can't use, so we're having to ask other people to pay a little quicker."

Some small businesses have been preparing for tighter restrictions. A week ago, Mark Strong, owner of JLI Electronics, learned that one of his two lines of credit had been cut in half. But he had already paid down debt, ordered supplies in smaller quantities, sold unnecessary equipment, and cut the credit of customers he thought could be affected by a recession.

He expects that his credit lines will be cut further. But he does not expect to lay off anybody. "We're battening down the hatches, that's all," says Mr. Strong, who strongly opposes any bank bailout.

In fact, despite the worsening business climate, many small businesses are continuing to hire, says Michael Alter, president of SurePayroll, a national payroll-services provider in Glenview, Ill., that uses its data to track small business.

Mr. Alter expects the firm's September survey of 20,000 customers will show a hiring rise despite an increase in pessimism. And, he says, their analysis finds that most small businesses are continuing to meet their payroll. "I'm worried about a month from now," he says. "It will get harder unless something gets done."

Banks have also been tightening their underwriting standards for private student loans, and some have been leaving the market altogether. Among the schools most affected are career colleges – private, often for-profit schools. These colleges often serve low-income working adults, who tend to be more likely to have lower credit scores and less ability to pay independently.

But even though these students have been having a harder time accessing private student loans over the past year and a half, it's still very rare for students not to find the funding they need to enroll, says Harris Miller, president of the Career College Association, a trade group in Washington.

States and cities are also waiting for the credit markets to thaw. On Wednesday, California's treasurer warned that the credit crunch posed a looming threat to the state's finances.

"For 10 days, state and local governments have been closed out of credit markets – long-term and short-term – in spite of the fact that they represent no default risk and provide a good tax-free return to investors," said state treasurer Bill Lockyer in a press release.

The loss of long-term credit endangers the ability of the state to follow through on voter-approved projects like road and school building. But the more immediate problem is that the state will run out of cash on Oct. 29, according to the state controller's office, and an additional $7 billion will be needed to carry on operations until spring revenues arrive.

Mr. Lockyer warned that if nothing changed and the state could not borrow, payments for teachers' salaries, police, nursing homes, and other services could be halted.

The controller's office, however, is adopting a calming tone. "We're confident the treasurer will find sufficient funding to meet the state's obligations," says Hallye Jordan, a spokeswoman in Sacramento.

• Monitor staff writer Ben Arnoldy in San Francisco, Monitor correspondent Simone Baribeau in New York, and Monitor staff photographer Melanie Stetson Freeman contributed to this story.

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