Credit crisis may be easing

Many people might not remember this, but the credit crunch started in the summer of 2007.

The credit crisis, which some say began in July-August '07, might have been easily forgotten if things turned out to be as manageable as some economists predicted.

But everything unraveled into a financial panic last September -- a panic that turned so ugly that Washington eventually agreed to bailouts for banks as well as automakers.

Now, things are on the mend.

"Even though we're not in a freefall crisis mode, we're still in a crunch," said Diane Swonk, chief economist for Mesirow Financial in Chicago.

Martin Baily, senior fellow for the Brookings Institution, said chances are good that the worst is over for the credit crunch.

Other economists agree that credit has gradually become more available. Swonk noted that credit markets have improved significantly since the near-collapse in the wake of Lehman's failure last fall.

Better, though, is nothing like the easy credit of years past.

New numbers, due out in a month or so, are expected to reflect that bankers continue to be reluctant to lend and illustrate that many consumers and business owners want to pay down debt, not take on new loans during this recession.

Growth in household and nonfinancial corporate debt outstanding actually fell in the second quarter of 2009 -- the first time on record since the data go back to the early 1950s, according to Moody's's estimates.

In the second quarter of 2009, debt for households and nonfinancial corporations fell year-over-year by an estimated 1.3 percent or $276 billion, according to Moody's The outstanding debt was $20.6 trillion.

Outstanding debt is the total debt owed by households and nonfinancial corporations.

By contrast, in the second quarter of 2006, the growth for household debt and nonfinancial corporate debt increased by 10.5% year-over-year or by $1.725 trillion. The outstanding debt for these two groups was $18.12 trillion.

Loan portfolios at major banks are tumbling.

Most of the loans that are being created aren't new debt, instead, most involve refinancing existing mortgages or extending existing credit, not creating new loans.

One reason is that consumers are hesitant about taking on new debt.

"They're not buying houses. They're not buying cars. They're not buying much of anything unless they absolutely have to," said Dana Johnson, chief economist for Comerica.

Comerica saw its total portfolio shrink about 4 percent to $46.6 billion in the second quarter. Comerica had $10.2 billion in new and renewed lending commitments in the second quarter. But when you break down that number, only $1.6 billion related to new lending commitments.

"We continue to see weak loan demand across our geographic markets," said Wayne J. Mielke, vice president of corporate communications for Dallas-based Comerica.

Typically, he said businesses and consumers remain cautious and try not to borrow during most recessions.

Bankers note that overall loan volume has fallen because loan losses are higher, loan demand has declined, more companies and individuals are paying off debt and bankers say there are fewer opportunities to make high-quality loans because of the recession.

Economists have seen some positive signs that the worst could be over. U.S. banks underwent a stress test during the spring and passed it, meaning the banks would not be asked to raise more capital.

Housing troubles appear to be showing some signs of nearing a bottom in many markets. The stock market has had a sizable rebound from the meltdown point in March.

Big companies are more able to borrow and refinance debt. "By this time next year, credit will be flowing more freely," Zandi predicted.

Or will it?

Baily readily admits that most economists did not see the financial crisis on the horizon two years ago when the credit crunch started out among problem mortgages.

"I don't think any of us realized so many people in the financial sector had bought such lousy assets," Baily said.

Why were so many so wrong?

Most economists were convinced that the price of residential housing overall would not go down significantly through much of the country. As home values tumbled, people couldn't borrow against their homes, spending slowed, jobs were lost and the recession officially began in December 2007.

Johnson and some other economists are forecasting that the U.S. recession could be bottoming out now. This summer might even mark the end of the U.S. recession, some say.

Even so, lenders could continue to be cautious until they see a turnaround in the troubling labor market.

"It will be well into 2010 before credit will be freely available again," said Johnson, who said the real crunch ended about two or three months ago.

Baily cautioned that more trouble could be ahead--and the crunch could get worse before it gets better--if the commercial real estate market proves to be far worse off than bankers have anticipated.