Consumer Credit Market Needs Investors
STEVE INSKEEP, host:
States may be expecting financial help, but most consumers haven't had any relief. Quite the opposite. Over the past few months, it's become much harder for many people to get credit cards, auto loans, and financing to buy appliances. And with consumers shut off from many loans, it could make the recession worse. NPR's Chris Arnold reports.
CHRIS ARNOLD: A few years ago, credit was ridiculously loose, and people with no jobs could buy expensive homes. Limits on credit cards were way higher than people could responsibly borrow. But now in the midst of the credit crisis, the pendulum has swung pretty far in the other direction. And a lot of people who arguably should be able to get a loan, can't get one.
(Soundbite of truck starting up)
Mr. DANNY SMOLENKSY(ph) (Plumber): I've been driving this truck about 10 years now, a little over 10 years, and it's over 262,000 miles on it.
ARNOLD: Danny Smolensky is a plumber in Angleton, Texas, and he clearly needs a new truck.
Mr. SMOLENKSY: I'm dented on every side here. The back door has been hit, and it's cratered in the lock here.
ARNOLD: And the truck's breaking down enough that Smolensky says it's starting to hurt his business.
Mr. SMOLENKSY: I - often I have to pull over and mess with the truck. We have days where we just cross our fingers it's going to start in the morning.
ARNOLD: But Smolensky says he's been turned down for an auto loan by two local banks. The reason seems to be a dispute stemming from some charges on his home insurance. His mortgage company reported that as a missed mortgage payment. That hurt his credit. And Smolensky says he's been amazed at the reaction by banks and credit card companies.
Mr. SMOLENKSY: It's like a landslide. And whereas I had an American Express card since 1972, they just - it's a couple of months ago here - sent me a letter stating that I no longer have $11,000 credit with them, I have $250. And all the other companies just followed suit, one after another.
ARNOLD: So Smolensky can't buy that new truck he needs. A lot of other people are in the same boat. The giant auto finance company GMAC isn't offering loans to anyone with a credit score under 700. GM's CEO says that excludes roughly half the buying public. Chrysler says some people with even better credit scores aren't qualifying.
Dr. JERRY WEBMAN (Chief Economist and Senior Investment Officer, OppenheimerFunds): Think of the ongoing implications of somebody like Danny the Plumber.
ARNOLD: Jerry Webman is an investment officer and chief economist at OppenheimerFunds. He says it's harder now for millions of Americans to borrow money, and that could send the economy into a downward spiral. He says the automakers and all kinds of other companies are making less money selling stuff. That will likely mean more layoffs and therefore even fewer people spending money.
Dr. WEBMAN: That's why a credit spiral like this is so difficult and has demanded so much government intervention in an effort to break that vicious cycle.
ARNOLD: Parts of the credit markets are improving. Banks are somewhat more willing to loan money to each other. Big companies are having an easier time getting short-term loans. But the market is still a mess for things like credit cards and auto loans. A big reason has to do with something called securitization. That's the process through which investors buy up bundles of loans to make money off the interest. That normally funnels a huge amount of money to average people.
Mr. TOM DEUTSCH (Deputy Executive Director, American Securitization Forum): Securitization had provided approximately 50 percent of all consumer credit over the past few years.
ARNOLD: Tom Deutsch is with the American Securitization Forum. He says that giant pipeline for funneling money to average people has frozen solid. He says the flow of money is still down 99 percent from last year.
Mr. DEUTSCH: That's ultimately going to take away approximately half of available credit. And that's particularly acute for those with any kind of impairment on their credit rating.
ARNOLD: That's obviously a serious problem for the economy. And if you follow the money here back up this pipeline, you come to the big investors, the pension funds, hedge funds, and others, who would normally buy up bundles of car loans and mortgages. Right now, they just don't want to buy them. David Kotok is chief investment officer for Cumberland Advisors.
Mr. DAVID KOTOK (Chairman and Chief Investment Officer, Cumberland Advisors): I have institutional clients. My largest institutional clients are a $65 billion pension fund. They may say to me, look, do you think we're going to have a depression? I say, no. Why won't we have a depression? Because we have a huge amount of monetary stimulus, huge fiscal stimulus. This economy is not as bad as everybody thinks. And the world is not coming to an end.
ARNOLD: Still, a lot of investors are acting like it is. Just yesterday, demand for U.S. Treasuries was so strong that investors bought them at a price where they get zero return. That's right, zero. They're just parking money somewhere safe and making absolutely nothing on their investment. So the government says this will be one of its next big priorities, to coax investors back into the consumer credit markets and get more money flowing to average Americans again. Chris Arnold, NPR News.
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