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News of a possible bailout deal sent stock prices up sharply today, but in a worrisome sign for the economy, the news seemed to have little impact on credit markets. A key bank interest rate had its biggest one day jump in a decade. Even before last week's turmoil on Wall Street, many companies were having to pay more to borrow money. Economists say the freeze in credit is likely to slow down economic growth, as NPR's Jim Zarroli reports.
JIM ZARROLI: McDonald's is a company with a strong balance sheet and a good credit rating. Banks are usually lining up to lend it money. But Richard Adams, a former McDonald's executive who now consults with franchisees, says the company recently sent out a memo about one of its lenders.
RICHARD ADAMS: There was a memo from one of the financial folks at McDonald's, basically raised alarm bells that Bank of America had stopped taking new loans and new loan applications.
ZARROLI: McDonald's says it has no credit problems, and it still does a lot of business with Bank of America. But the memo comes just as franchisees are having to spend tens of thousands of dollars for renovations tied to a new line of coffee products. And Richard Adams says it has now become harder for them to borrow the money they need to do so. ...TEXT: Across the business world, large and small companies are finding it harder to raise money. For example, a lot of companies fund their operations by raising money in the commercial paper market. But with the turmoil in the financial markets last week, money market funds, which are big customers for this kind of debt, suddenly stopped lending money. Jim Paulson is chief investment strategist at Wells Capital Management.
JIM PAULSON: It really, you know, creates a heck of a situation for a lot of companies, banks, other companies, that basically fund their day to day operations with their ability to sell commercial paper to these money market funds.
ZARROLI: At the same time, banks have become a lot more nervous about lending money, especially to weak companies. Lakshman Achuthan of the Economic Cycle Research Institute points to what happened this summer in the auto industry. He says the big three automakers have had more trouble borrowing money. He says that's the reason why they've cut back on their vehicle leasing programs. And with fewer customers able to lease autos, Oshafon says production has fallen sharply.
LAKSHMAN ACHUTHAN: In the middle of all of the financial drama on Wall Street last week, industrial production fell over one percent, and this was the largest decline since Hurricane Katrina, and nobody noticed at all. And this was directly linked to a plunge in auto production. It fell almost 12 percent.
ZARROLI: Achuthan says that's a huge decline, and it says a lot about the way different forces in the economy are interrelated. The credit crunch that got underway more than a year ago has already forced banks to reign in their lending, and companies are feeling it. And Achuthan says that means they'll spend less, which means less capital investment, fewer jobs, and lower salaries.
ACHUTHAN: All of these things on their own are like, you know, a butterfly flapping in China, and, you know, it really - it doesn't seem like a big deal. But when it happens nationwide, it is part of the pervasive decline in activity that is associated with the recession.
ZARROLI: The hope is that the bailout plan being hammered together by the Bush administration and Congress will start to restore confidence and clear some of the bad debt off the banks' balance sheets that could slowly convince lenders to begin parting with their money again. But even if that happens, the credit crunch has already gone on for more than a year, and a lot of damage has already been done. Jim Zarroli, NPR News, New York.
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