How the Credit Crunch is Hitting Home

The lending freeze is spreading from opaque parts of the economy to America's front door.


Where's the pain?

That's what most Americans have been wondering, as they digest warnings from Washington about the dire ramifications of a global credit crunch. Up till now, the credit freeze has mainly hit parts of the economy hidden from ordinary consumers: Short-term corporate loans, hedge-fund borrowing, derivatives markets. No wonder most people have been scratching their heads—and calling Congress to protest a massive Wall Street bailout.

But like the proverbial Blob, the credit crunch is now spreading beyond the back-office parts of the economy into areas felt more directly by consumers. The biggest examples:

Autos. Many analysts hoped that car sales would pick up from summer lows, now that gas prices have drifted back below the $4 threshold that spooked buyers. But sales in September were the weakest in 15 years—and the credit crunch is now the main culprit. "The scarcity of credit has forced sales into freefall," Credit Suisse analyst Chris Ceraso explained to investors. "Volatility and uncertainty on Wall Street [has] spread to Main Street, leaving consumers paralyzed."

Dealerships report that "subprime" borrowers with marginal credit ratings essentially can't get loans. Some "prime" borrowers are being shut out, too. At some dealers, loan approvals are down 50 percent. And most homeowners can forget about using a home equity loan to help finance a car—since home equity has been plunging, and those loans drying up, too.

Needless to say, problems for car buyers directly cause problems for the automakers and their workers, which still represent a sizable chunk of America's economic activity. Banks skittish about the fortunes of General Motors, Ford, and Chrysler are already charging them double-digit rates for loans, which are close to prohibitively expensive. As sales drop, the fortunes of the Detroit 3 will look even more grim, and money become even more scarce. Even Toyota and Honda, once thought invulnerable to market swings, have absorbed big sales declines and cut back on production. Whatever the status of the overall economy, there's no doubt anymore that the auto industry is mired in recession.

Stock portfolios. When bellwether behemoth General Electric announced that Warren Buffett was buying a $3 billion stake in the firm—part of a broader plan to raise about $12 billion—it signaled that problems in the "financial economy" were spreading to the "real economy." That fear has been one factor driving down stock prices across the markets; now, the fear appears to be morphing into reality and settling in at America's biggest companies. The Dow Jones Industrial Average, as a result, is down 7 percent in just the past month.

Small businesses. The news has been filled lately with anecdotal examples of independent restaurants, niche manufacturers, and other small businesses struggling to get loans and meet their payrolls. Now, broader evidence of a small-biz crunch is emerging. Most consumers track the Dow, which has caused heart palpitations with its wild gyrations over the past month. But the Russell 2000 index, which tracks much smaller companies, is down even more since September 1—with a drop of about 12 percent. That reflects small companies that are struggling even more than big ones. Privately owned businesses not represented on stock indexes may be having an even harder time. "The smaller the company the more likely it is that it needs access to capital," says Charles Payne, CEO of research firm Wall Street Strategies. "Money better get in gear sooner rather than later."

Housing. Everybody knows we're in the midst of a deep housing bust, with prices off by about 18 percent from the peak of the market in 2006. That's the biggest underlying problem in the economy right now, and a recovery is unlikely until the housing market bounces back. But the credit crunch may be pushing the turnaround point further into the future. With banks cutting off funds for every kind of lending, mortgage applications plunged by 23 percent in just one week at the end of September. That indicates potential buyers fleeing the market—even though rates are low for those who can get a loan. As buyers disappear and demand dries up, prices in a glutted market can only go down, which will only deepen all the other problems in the economy. It may have seemed distant before, but the credit crunch is now knocking on the front door.