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“"All, too, will bear in mind this sacred principle, that though the will of the majority is in all cases to prevail, that will to be rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.”     Thomas Jefferson,    First Inaugural Address, 4 March 1801

August 20, 2007

More Blowback From The Credit Crunch

by Doug Mataconis

Since Brad brought up the economy in this morning’s open thread, I figured I’d post this article which I originally posted this morning at Below The Beltway. I’m not an economist either, but when credit starts drying up, bad things can happen.

It’s not just the mortgage industry that’s being affected:

U.S. corporations for years operated by the maxim that you have to borrow money to make money. Now, the well of cheap loans is running dry.

The corporate bond market, the MasterCard for U.S. companies, has slowed to levels not seen since the recession of the early 1990s, as rising defaults among mortgage borrowers are causing lenders to question loans going to companies as well.

Without a healthy bond market, a swath of corporate activity is eliminated and the economy slows down. Firms stop borrowing to buy drilling equipment for coal mines, plants for manufacturing cars and land for expanding restaurant chains.

“It affects everything,” Michael Tarsala, an analyst for Thomson Squawk Box, said of the bond market. “It’s access to capital. It’s the lifeblood of a lot of big S&P companies. . . . They’ve been encouraged to borrow money to make money for so long, and now the spigot’s suddenly been shut off.”

Shares of Hertz dropped 6 percent last week after concerns that it will struggle to get low-rate loans, the key source of financing for rental-fleet purchases.

Farm-equipment maker Deere & Co. said last week that it is “putting the brakes” on production of construction vehicles.

Mortgage giant Countrywide Financial on Thursday had to tap its entire $11.3 billion emergency funding line after it could not get short-term loans, known as “commercial paper,” from the bond markets.

Home Depot is rethinking a plan to borrow money to buy back $22 billion worth of its stock. The turmoil in the debt markets might also scuttle the $10.3 billion sale of its wholesale supply business.

These are the things that recessions are made of.


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