As Parts Of Credit Market Heal, Crisis Deepens

President Obama and his new economic team have inherited a financial system in serious trouble. The stocks of many major banks have plummeted in recent days. Many seem in danger of collapse without more government help.

At the same time though, parts of the financial system are healing.

Outside of the historic inauguration of President Barack Obama, one of the more memorable, if less inspiring, quotes of the past week came from Paul Volker, the former chairman of the Federal Reserve.

At a Senate hearing, he summed up the current financial state of country:

"To put it starkly, we are in a serious recession with no end clearly in sight. The financial system is broken."

The United States is in the midst of a colossally expensive debacle that economists say will dwarf the savings and loan mess of the 1980s. And there are still a lot of problems.

But as the new administration takes over, there are some definite signs that parts of that financial system are on the mend.

"There's no question that there's been quite a lot of improvement since, say, after the collapse of Lehman Brothers," said Nariman Behravesh, chief economist of IHS Global Insight.

Behravesh says that a few months ago, we were in an economist's nightmare. Basically, the plumbing inside the economy — the pipes that money flows through to reach big and small businesses and people wanting to get a loan for a house or a car — suddenly froze.

"It's almost like lending came to a complete grinding halt," Behravesh said. "So now we've seen a gradual thawing out of markets."

One of the biggest reservoirs of money in the economy is the system of money market funds. Altogether, these funds hold several trillion dollars that they lend out to banks and major companies so they can meet payroll and continue to function. That reservoir had frozen.

David Glocke, who manages the money funds of the giant mutual fund company Vanguard, agrees the reservoir is thawing.

"We're really getting more back to normal in the money market area," Glocke said. "There is some degree of calm in the marketplace."

Glocke says that a few months ago, someone wanting to sell something like a short-term bank CD would struggle to do so. There were no buyers. That was stopping money funds from investing any more money, into banks or other companies. But now the government has intervened with a system of guarantees, which helped to break up the ice.

"Liquidity has been restored to the marketplace now," Glocke said. "I can go back in and I can sell securities to dealers on the Street. I'm certainly far more optimistic as a result of that in the money market space."

Things are also better in the mortgage market. The government has pushed interest rates to historic lows, which is putting a lot more money into many Americans' pockets as they refinance their home loans.

Still, it's hard for many businesses and people who don't have the very best credit ratings to get loans.

Arne Sorenson is the chief financial officer of the hotel corporation Marriott International.

"There are clear signs of improvement, I think," he says, "not withstanding that there is an abhorrence of risk."

Sorenson says it's still almost impossible to get funding for new hotels, even for low-risk projects that he says make sense right now. He says banks just aren't lending enough money. And that hurts the economy.

At Marriott alone, he said, "there are thousands of jobs that are not being created that normally would be created. And that's entirely due to the lack of credit available to fund new hotel projects."

So while money is flowing through parts of the financial system a lot better, the banks themselves remain in serious and deepening trouble.

Despite all the government support, Citigroup, Bank of America and others recently reported that they're still losing billions. That has rattled investors and sent their stocks plunging. So the crisis is still running strong in the banking sector.

Behravesh says we've entered a new phase in the crisis, where the economy is getting caught in a downward spiral.

"What's going on here is that up until a few weeks ago, it was as if the financial sector and the housing sector were dragging down the economy," Behravesh says. "Now it seems to be the other way around — the economy dragging down the housing and financial sector."

Now millions of Americans are losing their jobs. More credit card debt and all kinds of other loans are going bad, magnifying the banks' losses.

So right now, another massive bailout is being considered in Washington.