Difficulties in obtaining credit

Credit will be get harder and harder to obtain as the credit crisis spirals downwards. Between old credit lines getting reduced or shut down completely and new credit almost impossible to get things are going to get even tighter. This issues is discussed in the article titled It's a hard time to get new credit from the San Francisco Chronicle. Lets take a look -

With lenders reeling from the housing collapse and loan losses mounting, the crunch is intensifying, economists say. That foreshadows a long and difficult stretch for households and businesses, as loan markets struggle to regain footing.

What started out more than a year ago as a lender panic over mortgages has worked its way through the gamut of business and consumer finance. The result is that all kinds of loans, from mortgages to student loans to credit card debt, have become scarcer and more expensive.

"Credit is just plain hard to get. There's not much availability, and it comes at a very high price," said Jim Wilcox, an economist at the Haas School of Business at UC Berkeley. "Consumers are less able to buy new cars or go on expensive vacations. This is hurting employment and hurting the economy very broadly."

...
Mortgages, of course, have become more expensive because it's harder for lenders to sell them to investors. The huge loan losses posted by Fannie Mae and Freddie Mac, which buy mortgages and repackage them for sale to investors, have forced the two mortgage giants to cut back their role as middlemen, putting upward pressure on rates. Thirty-year fixed-rate mortgages average 6.2 percent, up from about 5.8 percent at the end of March, according to Bankrate.com.

...
Credit lines on home-equity loans and credit cards are being slashed. A survey of more than 1,000 people nationwide conducted by the San Francisco group Consumer Action found that almost 10 percent had had credit card limits lowered in 2008. And rates on credit card balances are getting boosted even for customers who follow the rules.

So much of consumer spending during the bubble was based on credit. People simply do not have the available cash and savings to make up for the loss of credit and equity. Rather than building a savings account the bubble brought us the illusion that equity would be the emergency money to fall back on. Now the emergency cushion has deflated and many have nothing to fall back on. Instead of making drastic changes it is easier to look for credit lines elsewhere. But those are not easy to find either. This is affecting the economic feedback loop.