The latest Federal Reserve survey of senior loan officers finds very few shoots of green in that garden. According to the survey, “A significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year.” And this assumes the economy won’t get any worse than it already is now! Here are some specifics (hat tip, Real Time Economics)

Commercial and industrial loans: Of 52 banks responding, none said they expect improving quality, but seven said they expect delinquencies and charge offs to stabilize at current levels.

Commercial real-estate loans: Only 1 of 51 banks (the other doesn’t make such loans) sees improving quality, and three see quality stabilizing at current levels. Of the 47 who see a worsening picture, 13 expected a substantial deterioration in 2009.

Prime residential mortgages: Only 1 of 50 banks sees improving quality, and seven see quality stabilizing at current levels.

Subprime mortgages: No bank sees improving quality, and only two see quality stabilizing at current levels.

Home equity lines: No bank sees improving quality, though nine expect quality to stabilize around current levels.

Credit card loans: None of the 31 banks who make such loans expects improvement, and three expect stabilization.

Other consumer loans: Only one of 50 banks expects improvement, though 12 see loan quality stabilizing around current levels.

According to a November report by the Federal Reserve, nearly 60% of banks severely tightened their lending standards on credit card loans and 65% on other consumer loans in the last three months. As unemployment and delinquency rates go up and lenders are trying to minimize their risk, the average American all of a sudden finds himself cash strapped… this at a time when home equity has dried up, 401(k)s and IRAs are losing value by the day, and many common stocks are barely worth the paper they’re printed on.

“We’ve been hearing about the liquidity crisis affecting banks for quite a while,” Joe Ridout, spokesman for the advocacy group Consumer Action, told the Washington Post. “Now we’re seeing it transform into a crisis affecting people’s personal finances as well. The next wave of the financial crisis may well be a credit-card-related crisis.”

Credit card companies are indeed clamping down hard on customers. Many Americans may have noticed that while their mailbox used to burst with junk mail of the “You’re Pre-Approved!” sort, these days the influx has slowed down to a dribble. That’s no coincidence – credit card direct mail offers in the third quarter of 2008 have seen a 28% drop year-over year as Visa, AmEx & Co. are struggling to cope with a tidal wave of defaults.

Moody’s Investors Service reported that charge-off rates rose 48% in August compared to the same month last year, the 20th consecutive year-over-year increase. This number is expected to go even higher in 2009, potentially exceeding the charge-off rates during past recessions.

Thus, credit card members are increasingly coming under scrutiny – and not just those in the subprime category. Customers with a credit score of 700, who were deemed “most creditworthy” just a year ago are not anymore. According to cardratings.com, 730 is the new 700.

The palette of “risk factors” has also broadened. Aside from late bill and mortgage payments, now location, profession, and even shopping behavior are considered. If you live in a high-foreclosure area, work in the real estate, auto, or construction business, and buy your household necessities at Wal-Mart, you’re likely on the target list.

One of the measures credit card issuers have devised to reduce risk is slashing credit limits in half. 60% of banks lowered the credit ceiling for existing nonprime and 20% for prime customers. And, as a testament that the intended “trickle-down effect” of the Fed’s massive rate cuts didn’t work at all, many companies have kept their interest rates at the same level or even raised them by two or three percentage points. Late fees, too, have been increased.

This tightening of credit translates directly to people’s shopping habits. While Black Friday weekend brought an overall growth of 0.9% in sales from last year, retail sales data show that that wasn’t enough to save the month of November. The MasterCard SpendingPulse reading noted that electronics and appliance sales dropped by 25% in November, luxury goods by 24%, and sales at clothing and department stores by 20%. Foot traffic decreased by 19% from 2007, meaning shoppers visited fewer stores.

C. Britt Beemer, CEO and founder of America’s Research Group, who has correctly predicted percentage changes in Christmas retail sales for 16 of the last 17 years, published his first negative forecast (of -1%) in 23 years, calling the 2008 Christmas shopping season a “perfect storm” for retailers.

Even as the average American is battening down the hatches and reining in consumption, the Federal Reserve seems to be going the opposite way, judging from the $700 billion bailout package that has – literally within weeks – ballooned into an estimated $8.5 trillion colossus. But despite throwing fistfuls of money at the problem, says Bud Conrad, Casey Research chief economist and editor of The Casey Report, “all the king’s horses and all the king’s men haven’t been able to put Humpty back together again.”

We don’t know whether the Humpty Dumpty economy can be saved… what we do know, though, is that every crisis holds danger and opportunity. By making the trend your friend instead of swimming against the stream, you can preserve your assets and profit handsomely, especially in highly volatile environments like the one we are seeing now. To learn more about how to generate double- and triple-digit returns in a crisis, click here.

Source: The Credit Crunch, Close Up and Personal

“The role of finance in the economy is going to come down significantly in the coming years,” Carlos Asilis, chief investment officer at New Jersey money manager Glovista Investments, tells the Wall Street Journal. “From a societal standpoint, we got carried away with finance.”

Wags might wonder if the Journal is deliberately playing down finance in keeping with its new emphasis on general news and especially politics now that it’s an arm of the Murdochtopus.   But as the paper rightly notes, “The trend already has hurt companies beyond banks and Wall Street firms. General Electric Co.’s first-quarter profits at its financial-services businesses were 21% lower than a year earlier.

Retailer Target Corp., which got 13% of its before-tax profit last year from credit cards, last month wrote off $55.5 million in credit-card loans, 8.1% of its total portfolio at an annualized rate.”

“I think you’re seeing a clear inflection point,” says Tom Gallagher, an ISI Group analyst. “Whether it’s financials as a share of the stock market or financials as a share of GDP, we’ve peaked.”

Indeed, the financials now account for over 21% of the S&P 500’s market cap.  That’s less than the 34% that technology represented at the height of the tech bubble in 2000, but the Journal is already calling the top.

For finance workers, this shift could resemble the 1980s, when manufacturing lost its pole position in the U.S. labor market and thousands found that skills they had honed over the years were less marketable. The Bureau of Labor Statistics already counts 60,000 fewer people working in finance than a year ago. Merrill Lynch & Co. is cutting 4,000 jobs, and Lehman Brothers Holdings Inc. is cutting 1,425. Many of Bear Stearns Cos.’ 14,000 employees are expected to lose their jobs when J.P. Morgan Chase & Co. swallows the firm.

Left unaddressed in the article is this most uncomfortable of questions: If our manufacturing sector has been hollowed out and shipped off to Asia on the assumption that “we think, they sweat”… and if even our think-work in the tech sector has been abandoned because moving money around was much more interesting and lucrative… what happens now that moving money around has lost its luster?

I’m not sure of the answer, but the fate of empires past has hung on similar questions.