(NEW YORK) Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession.

The combined value of two leading sources of credit - outstanding commercial and industrial bank loans, and short-term loans known as commercial paper - peaked at about US$3.3 trillion in August, according to data from the US Federal Reserve. By mid-November, such credit was down to US$3 trillion, a drop of nearly 9 per cent.

Not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly. Smaller declines have preceded three recessions since 1975; at other times, such declines tended to occur in conjunction with an economic downturn.

Policy-makers at the Fed are growing increasingly alarmed about the problem, which is an outgrowth of the woes of the housing and mortgage industries. On Wednesday, the Fed’s vice-chairman, Donald Kohn, said that the latest market turbulence appeared to be reducing credit to businesses and consumers, hinting that the central bank, in response, was prepared to cut interest rates further.

For now, though, the situation is looking bleaker for many businesses. Already, companies in everything from furniture manufacturing to website design are tightening their belts, delaying expansion and scrambling for other sources of cash.

‘This is a very big deal,’ said Andrew Tilton, a senior economist in the US economic research group at Goldman Sachs. ‘You’re basically crimping the growth of the more vulnerable companies. If they can’t borrow the money, their options are much more limited. They’d have to have less ambitious hiring plans, buy less machinery and cancel projects.’

By themselves, commercial bank loans have actually surged: Large companies have tapped prearranged lines of credit to weather the financial chaos that has accompanied the unravelling of the American real estate market.

But this source of finance has been nowhere near enough to compensate for the virtual shutdown of the short-term commercial paper market. Much of this debt had been pledged against the value of mortgages.

Some of the drying up reflects the end of a run of companies buying other companies using free-flowing credit. Some can be explained by what many economists view as a healthy return to the sceptical scrutiny of prospective borrowers by banks. But lenders and borrowers confirm that the credit tightening has already begun to cut money reaching healthy firms as well, affecting their spending and hiring.

What loans are being extended are going primarily to companies with long- standing relationships with banks. Lenders are reluctant to bet their increasingly scarce capital on riskier, less-established companies in a time of economic anxiety. That leaves many of those companies on a limb. — NYT

Source: Business Times