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Who Will the Sky Land On?

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All the headlines seem to be telling us the sky is falling. Economically, this time. I can accept that the sky might have come down a bit. But I'm not yet seeing anyone clobbered by chunks of heaven.

The Chorus of Doom is riffing on various forms of a “credit crunch”. A StarTribune story on troubles at Twin Cities auto dealerships sheds some light on the current availability of consumer credit:

CNW Marketing Research in Oregon reported that only about 64 percent of all auto loan applications were approved during the first three quarters of this year. That's down from 83 percent one year ago.

"It's tough right now to get customers credit," Cannon [a dealer spokesman] said. "We have customers coming in and we can't get them financed and we are using different banks and financing entities. The bottom line is, it's extremely tight."

Not so long ago, only customers who had marginal credit had problems getting vehicle loans. "About 50 percent of those subprime borrowers used to be able to get an auto loan," Cannon said. "Now, that's down to 10 percent."

Scott Lambert, spokesman for the 438-member Minnesota Auto Dealers Association, said the state's problem isn't tight credit -- it's fear.

"The vast majority of our members said that there is no real change in the credit situation from a week ago. The events on Wall Street or [in] Washington have not affected the credit market," Lambert said.

The spokesman said it is hard to find financing. But for who?

Overall the approval rate is down 19 points. The sub-prime approval rate dropped 40 points. It seems obvious, although I lack the underlying data for fancy math, that the overall drop in loan approvals is the result of a precipitous drop in sub-prime approvals.

If you can show an income and have a history of paying on time, you can still get an auto loan. But, just like in mortgage loans, the weaker borrowers are facing higher rates or are unable to find a loan at any price.

This seems to support those who claim the USA has been borrowing its way to prosperity. There are folks who would not have been in the credit market without some combination of government policy support and support from low-interest policy at the Federal Reserve. Enabling the sub-prime borrowers to buy on credit has boosted sales and economic activity.

The sub-prime borrowers may not be bad people, although everyone seems to have tales of foolish credit behaviour. Recent—and likely undocumented—immigrants buying large houses at the top of the market on their wages as cooks and cleaners. Plasma TVs inside, and new SUVs with big shiny wheels parked in front of, subsidized housing.

We’re learning that this spending was indeed fueled by borrowed money. And we’re learning that many of these lower-income folks are poor credit risks.

If Congress doesn’t keep fueling the orgy with vote-buying credit subsidy policies, the economy overall will take some lumps. But do not let the demagogues make you think it is worse than it is. Some folks are good credit risks. They can still borrow and buy.

What people buy will be influenced by energy costs. And they may hold off on some purchasing until the headlines stop telling them the sky is falling. Lower-income people might even believe the sky is falling because they can’t so easily get goods like they did a couple of years back.

But the bulk of the US economy is still working, still adding value, and still needs stuff. They are earning, but delaying big spending. By choice, for the middle class. By lack of credit, for the working class.

With additional uncertainty over investments, the bulk of the employed will likely be increasing their deposits in ordinary insured savings, CDs and the least risky mutual funds. So when the consumers decide it is O.K. to buy, they might just pay cash. And the sky will be pushed upward again.