Lights are on, but banks increasingly closed: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

LONDON (Reuters) - The second half of 2008 looks like it will put the "self-reinforcing" into "self-reinforcing credit spiral."

Banks in the U.S. are cutting back savagely on credit to individuals, making mortgages and consumer loans tougher to get and more expensive.

Borrowers in turn are missing more payments, prompting more writedowns and leaving the banks still less to lend.

Securitization, once celebrated as the shadow banking system where lenders could pass on repackaged debt to eager investors, is little more than a memory with the exception of the government-supported Fannie Mae and Freddie Mac markets.

All of these factors are magnifying one another.

And the banks themselves say it is going to get worse.

The Federal Reserve's July Senior Loan Officer survey, one of the best indicators of on-the-ground conditions, showed broad and deep tightening across a range on consumer and housing loans, even in the face of slackening demand.

About 75 percent of domestic lenders tightened their standards for housebuyers, even the best borrowers, in the second quarter. That's a huge majority and up from 60 percent of lenders in the April survey.

And if you want a home equity loan: forget it. About 80 percent of domestic banks have raised their hurdles for making loans.

But the most striking tightening was in consumer lending, where about 65 percent of domestic banks made it tougher to get credit card loans, more than double April's 30 percent.

Many banks said they would continue to tighten for the rest of this year and into 2009.

"It looks both worse and more broad-based than the crunch in the early 1990s," said Peter Possing Andersen, senior analyst at Danske Bank in Copenhagen. "You are seeing a second round now where credit tightening is showing up strongly in consumer and business loans."

And of course this will make it worse for consumers and for banks, and demonstrates that the Federal Reserve's unprecedented measures to try and break the cycle have yet to work.

The Fed has cut rates, it has orchestrated bailouts and it has provided huge amounts of liquidity through new lending programs. But liquidity and capital are two different things, and what banks lack, and can see dwindling further, is capital.