Pain Spreads as Credit Vise Grows Tighter The latest outgrowth of the housing crisis, the breakdown on Wall Street, threatens to gradually corrode economic activity on Main Street, mainly by disabling the credit on which so many everyday transactions depend - but also by frightening people. Lenders of all types had already been raising the bar for borrowers, turning away all but the best customers. This week, they became even less willing to part with their money, further crimping budgets and family spending. An economy propelled by easy credit for more than a decade is fraying as credit disappears. American Express, to take one striking example, is reducing the maximum credit limit for half of its tens of millions of cardholders. The credit shock is in some ways reminiscent of the 1973 oil embargo, which "came into people's lives right away," said Andrew Kohut, director of the Pew Research Center, the public opinion pollster. Then, Americans were forced to line up for gasoline and turn down their thermostats in winter. Though less visible, the credit squeeze, if it persists, will force businesses and consumers to cut spending more than they already have. "We have moved into a decline in consumer spending, which normally happens only in a major recession," said Ethan Harris, chief domestic economist at Lehman Brothers. He calls the experience "a slow-motion recession in which economic growth will be near zero for an extended period of time." Consumer spending accounts for two-thirds of American economic activity and has been slowing as the value of homes falls. Although the economy is not yet in a formal recession, consumer spending in June and July grew only because consumers paid more for the same goods. After factoring in higher prices, they actually bought less. Borrowers are finding that the nation's lenders are tightening up in numerous ways. American Express is hardly alone. After several banks said they would not lend the asking price, a tractor-trailer dealer in North Carolina had to cut the $20,000 he was seeking for a second-hand tractor to $14,000. And a commercial real estate agent, trying to raise $4 million by refinancing an apartment building, got only half that amount from the Bank of Smithtown on Long Island, even though the building was appraised for $10 million. "With marginal lenders in trouble, we have more people than ever coming to us for loans," said Brad Rock, chairman of the Smithtown bank. So all of a sudden, we can be much pickier in deciding what loans to make and how much to lend. Being pickier means that an American Express cardholder whose maximum has been reduced to $1,000 from $1,200 has that much less to spend on clothing or meals out, purchases that lift the economy. At $14,000 for a used tractor, a trucker, caught in the same squeeze as the dealer, would lack a sufficient down payment for a new tractor, which costs more than $100,000. Indeed, many truckers in this situation find themselves looking for other work, even as job seekers across the nation outnumber job openings by more than 2 to 1, the biggest mismatch since 2004, the Bureau of Labor Statistics reports. And the commercial real estate agent is shy $2 million that would have been invested in a new venture to generate economic growth. Mr. Rock, also chairman of the American Bankers Association, with 8,400 affiliates, does not see a problem in this turn of events. "Now people are going to actually have to have a job to get a loan and they are going to have to make installment payments that are already higher per dollar borrowed than they used to be," he said, arguing that the debt-fueled prosperity of the bubble years was unsustainable. But there is not, for the moment, an adequate replacement. Henry Kaufman, a Wall Street economist, ticks off the alternatives and discounts them. Exports could carry some of the load, but the surge in the first half of the year is fading as European and Asian economies weaken. Here at home, capital spending by business on new buildings and equipment could provide a lift, but that, too, is beginning to fade as corporate profits - and demand - weaken. Just Wednesday, FedEx announced that profits had shrunk in the latest quarter as freight traffic declined. Home construction is off the table, of course, as a means of lifting the economy. That leaves government, which could inject money into the economy through aid to the states or infrastructure spending or another round of tax rebates. The administration has suggested a program, akin to Resolution Trust Corporation's role in the savings and loan crisis, that could help rescue the housing market. The program would buy distressed-assets and then dispose of them overtime. In a news conference Friday morning, the Treasury secretary, Henry M. Paulson Jr., said he would discuss the plan to create the government-sponsored vehicle with members of Congress this weekend and expected them to pass legislation next week. Meanwhile, the barriers to borrowing go up. By late summer, a majority of the nation's lenders had tightened standards for every type of credit, the Federal Reserve's bank surveys show. Home equity lines of credit have been canceled or reduced as home prices have fallen. Credit card companies are imposing higher delinquency fees, stepping up collection efforts and checking on repayment histories. "More and more, they don't give the card if you don't have a good credit record," Mr. Harris, of Lehman Brothers, said. Michael O'Neill, an American Express vice president, agrees. He adds that the company is offering fewer new cards than in the past in Florida, California and parts of the Southwest, all areas where home prices have fallen the most. And quietly, American Express is skinning back credit limits. The company is always reviewing its millions of accounts, normally increasing the limit on three out of four, and decreasing the fourth. Since July, "the tilt is 50-50," Mr. O'Neill said. The North Carolina truck dealer originally listed a 2001 Freightliner for $20,000 on truckertotrucker.com, an online marketplace for tractors and trailers, and this week, he dropped the price to $14,000 because of the growing resistance from bankers, said James McCormack, who operates the site. "The banks were giving loans for the full value of these trucks and the value was falling, and the truckers found themselves owing more than the trucks were worth," Mr. McCormack said. They found themselves forced to keep driving or let the banks repossess, and many have elected repossession. Debt traps and loan famines, in one form or another, can prove costly to companies. Harley-Davidson, for example, which finances purchases of its motorcycles, is issuing bonds and notes at slightly higher rates to support its financing arm. Restaurants in the casual-dining sector are in a severe slump, according to industry analysts, and will most likely come under further pressure. The pancake house IHOP bought Applebee's last year with a strategy of selling off company-owned stores to franchisees. Now known as DineEquity, the company may have problems finding prospective franchisees who can obtain financing, industry analysts said. The winners so far are the Brad Rocks of America, the bankers who have emerged unscathed, their capital intact and with enough retained earnings to support lending, on their terms. A residential mortgage from Bank of Smithtown requires 20 percent down and clear evidence of adequate income to repay the loan, as well as a good record of paying down debt. Bank of Smithtown specializes in small businesses - the stationery stores, pizza parlors and pharmacies of eastern Long Island with annual revenue of $2 million or less, regularly in need of bridge loans, for example. During the credit boom, Mr. Rock said, many of these business owners went to lenders who required, as he put it, nothing more than a tax ID number to qualify for a loan. "Now many of these lenders are gone," Mr. Rock said, "and the small-business borrowers are coming to us, and we are doing good old-fashioned underwriting, and the result is that fewer people are getting loans."