Get ready for the consumer credit crunch
Forget the double-dip recession; we could be in for a second helping of credit crisis, this one hitting consumers and their credit companies. Here's what that could mean -- and which stocks could take hits.
By Jim Jubak
Are we headed for an unexpected double-dip credit crunch?
All the attention is on the possibility of a double-dip recession -- the chance that economic growth will slow enough to push the economy back into recession only a year after the three-quarter recession of 2001.But while we’re all waiting to see how the macroeconomic numbers turn out, we shouldn’t ignore company-specific numbers suggesting that an avalanche of bad loans could be gathering. That, in turn, could cause lenders to choke off credit to a significant segment of the economy. Again.
Remember the first credit crunch?
It developed in two stages. In stage one, telecommunications and networking companies such as Lucent Technologies (LU, news, msgs), Nortel Networks (NT, news, msgs), Cisco Systems (CSCO, news, msgs), Nokia (NOK, news, msgs), and Ericsson (ERICY, news, msgs) extended more and more credit to increasingly risky customers. As the pressure mounted to keep earnings growth high -- even as real growth began slumping -- many of these companies stopped worrying about the ability of their customers to repay loans. Every order was critical to making Wall Street revenue projections for the current quarter. Minor questions such as when and whether the seller would actually see cash could be answered later. That turned out to be a mistake; many of these customers did indeed prove unable to return the money they’d borrowed. Sellers had to admit that the sales they'd made to these companies weren’t real. Then, under intense scrutiny from investors, the companies simply stopped lending to most customers.
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