Credit crunch gets worse

The Dow is down 86 points after the first half hour of trading, which doesn't seem so bad considering this morning's headlines about WaMu and the collapse of the bailout plan. Some will say it's a sign that the financial markets can survive even amid all the bad news. But there's just one problem: credit continues to be super-tight. "Loans are basically frozen due to the credit crisis," developer Vicki Sanger told the NYT. She's now using personal credit cards with double-digit interest rates to finance a project in Fruita, Colo. Just to state the obvious: If banks aren't willing or able to lend much money, the economy stalls out.

Many experts fear the fraying of the financial system could pin the nation in distress for years. Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral. Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers.

[CUT]

“The situation is like that movie trailer where a guy with a deep, scary voice says, ‘In a world where credit markets are frozen, where banks refuse to lend to each other at any price, only one man, with one plan can save us,’ “ said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. And yet, the more he looked at the data, the more Mr. Bernstein became convinced the financial system really does require some sort of bailout. “Things are scary,” he said.

And yet, they're obviously not scary enough to convince a sizeable constituency that federal intervention is needed. Instead, we're seeing the debate turn into a de facto culture clash - real 'Mericans vs. those conniving Wall Street bastards. McCain is clearly playing into this divide. Bernstein is right: Things are scary.