Posted by: Discover Scholars | September 20, 2008

Follow-up to “The Credit Crisis”

Yesterday, we talked about some of the “real-world” effects of the credit crisis. Readers who would like to read more about the past week’s financial events should have a look at this guest post by Doug Diamond and Anil Kashyap on the Freakonomics blog.

Of particular note is their response to Question 4:

4) I do not work at Lehman or A.I.G. and do not own much stock; why should I care?

The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding.

As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years. (our emphasis)

As we explained yesterday, the risks that come with lending to students make it likely that they will be one of the first groups to face higher borrowing costs.

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