Thursday, October 2, 2008

Is It Extortion?

I try not to think of the current credit crunch as a conspiracy to extract free money from the taxpayers. But the problems the State of California is having arranging bridge loans makes me wonder. Governments are generally very good credit risks; after all, they have an ability to raise money from a nearly bottomless pit. (Yeah, us.) So I wonder if the threat not to lend to the state government doesn't indicate that the banks are overplaying their hand here.

There's a lot in the credit crunch that's bad. But there's some common sense in it too. As real estate prices have fallen, people find it more difficult to borrow against their houses. Well, they should find it more difficult. They don't have as much equity in their houses and the banks look at that in deciding how much to lend. And if the banks believe that prices may fall some more, they're going to be a lot more conservative in their lending decisions.

And cars. People are having trouble getting car loans, but if you read down into the articles, it's because they can't come up with the down payment from their home equity. See above. When they have to finance a car without that down payment source, they have to buy smaller, cheaper and, hopefully more fuel-efficient, cars.

Particularly in the big bubble areas, we can expect that all sorts of retail will go out of business. These businesses were subsidized with home equity extractions. Without that, there's a lot less money around and at least some, if not a lot, of retail establishments won't make it. So the housing bubble won't just bring us empty houses, but empty storefronts as well.

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