Amid Bailout Failure, Fears Credit Woes May Spread

Credit markets have been thrown into further turmoil following the House's rejection of the $700 billion financial bailout plan. Economists fear credit will become so tight banks will be unable to lend even to those people who are regarded as solid credit risks.

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MELISSA BLOCK, host:

You're listening to All Things Considered from NPR News. There's been a lot of doomsday talk about the financial crisis and Wall Street's desperate need for a rescue. Well, today, the bailout bill did not pass, so to understand how much we might really be at risk, we've asked NPR's economics correspondent Adam Davidson to join us. And Adam, if disaster were to strike, how soon would that be? When would we know?

ADAM DAVIDSON: Well, that obviously is the huge question. I would say that the people I talk to, the economists and, you know, folks at the Fed and the Treasury Department, they are not looking at the stock market. We should immediately say that. The stock market always tends to dramatically overreact, overreact positively, overreact negatively. It's not really a helpful indicator.

BLOCK: So don't worry about that 800-point - some 800-point drop today?

DAVIDSON: Well, it's hard not to notice it. But that's not the bellwether of what is to come. The bellwether really is how are the credit markets going, I mean, those conversations you just had, that's what business people are concerned about. The fear is that this crisis, it's already a full-on credit crisis - in the financial industry, the fear is that we'll spread to the non-financial world, to what economists call the real economy.

BLOCK: And what does that real economy show you?

DAVIDSON: Well, it shows you that credit is tight, but it's tight in normal ways. Sort of typical, either slowdown or recession ways. The real fear here, the deep fear - the thing that's keeping Bernanke and Paulson up at night, that sort of thing - is that credit will become so tight that basically banks will be incapable of lending even to people with really good ideas, even to people who are very solid credit risks. And when that happens, really good ideas, reasonable businesses that should thrive can't. Like that woman you just talked to from the pet store.

BLOCK: Mm-hmm.

DAVIDSON: People who are offering goods and services to the economy can't. They fire people, they lay people off. That is the real fear. That's when this goes from just being a typical cyclical downturn to a true crisis.

BLOCK: And the warnings about that, Adam, had been so emphatic. There have been predictions of a crisis that would rival the Great Depression. Millions of jobs lost, is that credible, do you think?

DAVIDSON: I will say that I am finding it hard to find economists who echo that from the left, right and center. I think everyone agrees this is a very serious crisis, that it would be good for something to happen to lessen it. I am finding a lot of people who say, this will right itself. That is what markets do. It might take a while, it might take a year or two, but it will right itself. There will be good ideas, good entrepreneurial folks in America, good businesses with good goods and services, and people willing to lend them money. So, I'm choosing to mostly be optimistic. But the truth is, will this be a disaster? It's so hard to know. You've got to flip a coin in the air, and as I told a friend today, then you've got to grab that coin and hold onto it.

BLOCK: And put it in your pocket.

DAVIDSON: Just in case.

BLOCK: OK, NPR's - cheery news again, Adam. Thanks so much.

DAVIDSON: Thank you.

BLOCK: NPR's economics correspondent, Adam Davidson.

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