The sub-prime mortgage collapse that led to the current U.S. financial crisis has not had as deep an impact in the middle of the nation as it has had on the east and west coasts. But economists say a credit crunch will affect all regions of the country. As VOA's Greg Flakus reports from Houston, even an economy buoyed by a booming energy sector is not immune.
When housing prices soared in other areas of the country, cities like Houston, Texas saw only modest increases. So when prices went into steep declines elsewhere, people here did not worry. But tightening credit overall is having an impact.
Some builders have shut down because they cannot get the financing they need to proceed with developments. The situation worries small business owners like Linda Heckman, who runs a gift shop in a Houston suburb.
"I use my credit card to buy merchandise for the store," she said. "If I cannot do that, then I cannot buy merchandise for the store."
She says an economic slowdown would also affect her customers and reduce her sales. She says she hopes Congress will act soon to restore confidence in the system.
One person keeping a careful watch on the situation is Barton Smith, a University of Houston economist who provides economic forecasts for the city.
"Home prices in Houston are essentially flat," he said. "That is a lot better than being down 15 to 20 percent, like many urban areas in the United States. So we are doing better, but we are not totally immune. We are already seeing increasing reports of businesses in Houston that are having a hard time maintaining their lines of credit just to continue to do business."
Smith says the soaring price of oil in recent years, which helped slow the nation's economy overall, has so far had a positive effect in Houston where many oil and gas companies, as well as energy services companies, are located.
"Energy is what is keeping our head above water and allowing us to continue to grow while a lot of the rest of the nation is suffering job losses," he said. "But if the problem gets worse and spreads more rapidly through the global economy, then it is going to continue to put significant downward pressure on oil."
The price of a barrel of oil has dropped about $40 in the past few months, although it is still more than double what it was just a few years ago. But a prolonged economic slowdown could reduce demand for energy and the price of oil.
Rice University economist Barbara Ostdiek says that could hurt Houston.
"If a slowdown in the global economy pulls down the price of oil then, certainly, you would expect that to have an effect on the Houston economy," she said. "Now, that does not mean it is devastating."
Ostdiek says the energy industry is likely to remain strong here even, if there is a drop in oil prices. But, she says, a global recession that drove down demand in fast-growing nations like India and China could put even greater downward pressure on prices for most commodities - including oil.
"As China and India sort of shudder in the wake of our current financial crisis, there is concern about their export-driven economies, particularly in China, and the extent that they are driven by the ability to sell products into our market," she said. "So the commodity prices are reflecting not only that slowdown in our demand, but also the slowdown in what have been very rapidly growing economies."
In a sense, Barbara Ostdiek says, the problem of easy money and easy credit is coming full circle, since it was foreign countries, like China, that bought many of the financial instruments produced in the United States and thereby kept the freewheeling system going.
"For a while, we were able to consume beyond our means and it was essentially funded by the rest of the world," said Ostdiek. "What we are seeing now may be a not too pleasant, but a necessary, adjustment of these huge global imbalances."
For that reason, Ostdiek is among the many economists in the country who favor government action that is carefully crafted to shore up confidence in banks and the credit system. Although she says Congress needs to act soon, she maintains there is enough time to develop a plan that will work without putting taxpayer money at great risk.
Barton Smith agrees:
"It is important that we find a solution, but it is also important that we find the right solution," he said. "And I am not sure that the Paulson plan, even with all the various Band-Aids [bandages] that have been put on it, is the correct solution."
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