Today’s economic climate means many people and organizations are finding themselves in a state of panic. Political and economic forces on the macro level have now filtered down to the micro level and are directly affecting many of our lives. People who previously did not have these worries are now finding themselves in a state of anxiety about how to pay bills and how to plan for the future. A collective fight or flight syndrome seems to be gripping the country. Some people are frozen in fear and others are acting impulsively, perhaps selling off big chunks of stock or making drastic cut backs in their companies. According to Annie McKee in a Harvard Business School Publication (2008)
“When we are paralyzed by emotions like fear, anger, or acute distress, we literally shut down. Our cognitive abilities are impaired, we see fewer options, and our creativity and resilience are inhibited. And it gets worse—because emotions are contagious, toxicity spreads from one person to another, group to group, country to country.” This type of reaction is not going to help us as individuals, companies or a nation get out of this economic mess. We need to diminish our fears so we can think with clear minds, solve our problems, and most of all we need to open the door to hope and the idea that “this too shall pass” and that we will find ourselves in a much better place. That being said, what can we do to alleviate our fears as we wait for things to turn around? First, we need to look our situation squarely in the face, understand what contributed to it and examine objectively where we find ourselves. Secondly, we need to name and address our fears, looking at what we can and can’t control, and separate what is rational from irrational. Finally, we need to take what we learn from looking at our situation and our fears and create a plan to address the things we can control.
In this article, I will provide information on what this current economic crisis means for us as individuals, provide some good news to take into account, and offer suggestions about what individuals and companies can do to protect their assets during these challenging times. Back to Top ^
THE ECONOMY
The Situation: If you are like most people, you are no doubt looking at the current economic state in this country and around the globe and wondering how we got here. We are hearing a lot of bleak news about people losing jobs, companies going under and stocks plummeting. Many of us now know that this crisis has something to do with the debacle of reckless mortgage lending and shoddy Wall Street deal-making. This had been going on for some time, so why didn’t we see this coming?
According to Jeremy Grantham, co-founder of the investment firm GMO, denial is at the root of the problem. “All you had to do was open a history book and see what happens when you have a bubble. In this case, there was a bubble in housing and there was a magnificent bubble in risk-taking. People were just shoveling their money into risk on the pathetic idea that risk is always rewarded.” He goes on to say that buying risky stocks is not rewarded but what is rewarded, is buying cheap assets. Grantham says, “You can lay the evidence in front of everybody, but they will yawn and ignore it. It’s that denial that’s impressive. It’s what happens in bubbles.” (C.F. Revell & Light, 2008)
Diane Swonk, the chief economist of Chicago’s Mesirow Financial, and adviser to the Federal Reserve Board, agrees, saying, “The housing bubble is certainly the root of the problem in the financial markets. If you were a home buyer…you didn’t have to put any equity down to get a mortgage.” (C.F. Revell & Light, 2008). Homeowners who had obtained easy credit, sometimes with little to no documentation, were buying properties that they could not truly afford. It became a sellers market as housing prices soared. Buyers were then only able to afford ever-larger properties by taking out more risky mortgages that lenders continued to approve with little backing or no money down. Then Wall Street investment banks got a not-so-brilliant idea: bundle the riskiest of these mortgages, then slice and dice these portfolios into tradable bonds to be sold to other banks and investors. What made this worse is that bond-rating agencies then put their highest ratings on the “best” of this bad debt. This way of doing business imploded when the “subprime borrowers” began defaulting on their mortgages. This sent housing prices plummeting, which unleashed a domino effect on mortgage-backed securities. The banks and brokerages that had borrowed money to boost the impact of these risky, over-leveraged investments had to race to raise capital (CNN Money.com, 2008). All of this is why some companies like Merrill Lynch, were forced to sell and why others, like Lehman Brothers, had to close their doors. Most experts agree that the current situation we find ourselves in will get a bit worse before it gets better. Forecasters are predicting an even more precipitous fall in corporate profits, more reduction in consumer spending, and a continued tightening on lending. Mark Zandi, chief economist for Moody’s Economy.com, says “the consensus view is that we’re in a recession and will be in one until next year.” (C.F. Gandel & Lim, 2008)
What’s the Good News?
After looking at how we got here and what is likely to happen next you may be wondering, “So what is the good news?” You may also be wondering how bad our current situation is compared with financial crises in the past. According to John Steele Gordon, market historian and author of An Empire of Wealth, “It feels bad but not like a panic. In a classic panic, as in 1987 or 1929, everyone was selling and prices went through the floor. The market lost 22% on October 19, 1987, compared with 4% on the day Lehman Brothers filed for bankruptcy. We were getting close to a breakdown in the whole financial system, but now that decisive government actions are being taken, we’re stepping back from the brink.” If you compare our current situation to the 1929 stock market crash, the government then didn’t do much of anything to end the crisis but what they did seemed to make the situation worse. Then the Federal Reserve “kept interest rates high and the government implemented the largest tariff in American history, which was effectively a big tax increase in a declining economy. These things converted a perfectly ordinary recession and market crash into the greatest economic calamity in American history.” (Gordon, 2008 C.F. Revell & Light, 2008).
On the other hand, it was the Federal Reserve that ended the panic in 1987. To put things in perspective, even without a bailout, the federal budget was expected to hit $482 billion last year and if the government aid pads that figure by $200 billion, the deficit will be back to where it stood in the 1980s - around 5% of Gross Domestic Product. David Wyss, Standard & Poor’s chief economist, expects a mild recession that will end this spring. “Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help,” he says. “This is a financial panic, not an economic one.” (Gandel & Lim, 2008)
There are a few other silver linings to be found in this current economy. The weak dollar is increasing the demand for US goods abroad, and lower gas prices are helping Americans feel like they have some more cash in their pockets. According to James Paulsen, chief investment strategist of Wells Capital Management, when we add in the cash that the Fed has been pumping into the banking system, we are bound to see growth in 2009. “If this entire stimulus has no effect on the economy that would be a rarity indeed.” (Gandel & Lim, 2008)
What You Can Do: The first thing you can do to address the current economic situation we find ourselves in is to remain calm. The next step is to get informed.
The Situation: It is not news to anyone that the stock market and those of us in it are taking a beating. The sometimes daily roller coaster ride is prompting many to get out. Many stocks are trading lower than they were at the start of 2000. Even bonds, which are low risk and low return investment vehicles, have beaten equities during this time. And with the “bailout” investors shouldn’t get overly enthusiastic. Some experts fear there will be unintended consequences from this remedy. If the budget deficit were to balloon that could further weaken the dollar, which would lead to another bout of inflation fears. “Rising inflation and a falling dollar, in turn, would likely boost market interest rates, since it will take a big carrot to entice foreign investors to buy U.S. bonds. When rates are on the rise, investors typically aren’t willing to pay up for stocks in the form of higher price and earnings ratios.” (Gandel & Lim, 2008).
Many investors are asking when stocks will bounce back. Experts warn that we should not expect an immediate rebound. The economy is expected to remain a drag for some time to come, with many economists predicting that this recession could last through the spring or fall of 2009.
What’s the Good News? Part of the good news for the stock market is that stocks are not expected to languish the entire time of the recession. Equities have a knack for rallying in anticipation of an eventual recovery (Gandel & Lim, 2008). It is possible that a stock market rebound could take place sometime in the first half of 2009. Historically, when a market bubble has popped, it has almost always overcorrected. (Grantham, 2008 C.F. Revell & Light, 2008)
According to Diane Swonk, despite the turbulence of today’s stock market “we’re still looking at a pretty favorable environment over the longer term for stocks. Productivity growth is accelerating—we all know this, of course, because we’re working harder for less money. Rising productivity leads to rising corporate profits. That, historically, has been highly correlated with a bull market.” (Revell & Light, 2008)
If you still have the urge to purge your portfolio consider that in 2008, fund investors took more money out of their stock funds than they put in. This marks only the third time in recent history that this has happened. What was the other two times? The first was in 2002, just before a five-year bull market, and the second was in 1988, the start of a 12-year bull. According to Standard & Poor’s, equities typically recoup a third of what they lost in a bear market in the first 40 days of a new bull market. (Gandel & Lim, 2008)
Many financial planners warn that leaving the market now with hopes of getting back in when things are good is not a good idea because you probably won’t make it back in time to enjoy the recovery. Experts still say that over the long term (meaning more than 10 years) the stock market gives you something fixed-income investments can’t: a share of growth. The benefit of owning a stake in a company is that you get to share in the earnings of the firm. Because stock prices, over time, reflect corporate profit growth, you’re likely to far outpace the long-term rate of inflation. (Gandel & Lim, 2008)
According to Alan Skrainka, chief market strategist for Edward Jones, if your faith in stocks is still wavering, consider the last time they performed so poorly: the 1930s. “What if you concluded then that stocks weren’t the best place to be? You’d have missed out on decades of bull markets.” (C.F. Gandel & Lim, 2008)
What You Can Do: If you resist the temptation to flee the market entirely there are things you can do to protect your portfolio and make a profit in the long run. This may start to sound like a mantra but… DON’T PANIC, that’s the Number 1 rule. The Number 2 rule is to think long term.
According to Gandel and Lim writing for CNN Money.com, “Selling stocks after they’ve sunk to a three-year low in hopes of buying them back after they’re trading at higher prices is a surefire recipe for losing your shirt.” Keep telling yourself that you are a long-term investor and resist the temptation to check stock prices on a daily basis. Ronald Rogé is a financial planner who suggests taking a cue from Warren Buffett. “Here’s the smartest guy on the block, and his firm, Berkshire Hathaway, is down like most other stocks this year.” But instead of looking to sell, Buffett is buying.
Consider some tips from a collection of financial experts writing for CNN Money.com:
Shift some of your money to high-quality blue chips (Revell & Light, 2008;Gandel & Lim, 2008) and emerging markets that are probably no longer tooexpensive. “If you had 80% of your stockholdings in blue chips and 20% inemerging markets, you’d have a pretty reasonable portfolio to ride out the badtimes.” (Revell & Light, 2008) Not every large company can weather tough times.But as a whole, the category clearly can. (Gandel & Lim, 2008)
The staff writers at Money Magazine (2008) suggest the following recipe for your stock portfolio to earn a yield of nearly 5%. Start with a conservative fund that holds a broad assortment of stocks paying generous dividends. An ETF (exchange-traded fund) is the cheapest way to go. Then boost your take by putting some money into a higher-yielding stock ETF. They then suggest putting the rest into low-cost bond funds and perhaps a Real Estate Investment Trust (REIT) to add diversity and boost your yield.
Follow the Warren Buffett School of investing and only buy a stock if it’s trading well below its intrinsic value. When the market plunges 5% in one day, lots of stocks might look like they belong in a fire sale but are they really a good buy? How do you know when a stock is really a bargain? You can visit morningstar.com to learn how to identify a stock’s true value. (Money Magazine, 2008)
The Situation: With all this talk of recession, and climbing jobless claims and unemployment many people fear that they may lose their jobs. Some people in the financial and housing industry are in fact panic-stricken. The U.S. Department of Labor reported on November 6, 2008 that initial filings for state jobless benefits reached 481,000 for the week ending November 1, 2008. The number of Americans continuing to receive benefits is at 25-year high. (C.F, Moscrip, 2008)
In 2008, the U.S. economy lost 2.6 million jobs, according to government reports. Most of the layoffs have come in home building, the auto industry and financial services. In 2009, the Conference Board forecasts another 2 million lost jobs. (Smith, 2009)
What’s the Good News? According to James Paulsen, chief investment strategist of Wells Capital Management, “this is the strongest recessionary job market in 40 years.” (C.F. Gandel & Lim, 2008). If you take the home building, the auto industry and financial services out of the equation, the U.S. economy has created 90,000 jobs. “Companies are continuing to add executive positions even as the market slows,” says Mark Anderson, president of ExecuNet, a Norwalk, Connecticut firm that tracks management hiring. (C.F. Gandel & Lim, 2008)
More good news has come with the recent election of President Barack Obama. His plans could help to improve the US job market by:
Funding federal workforce training programs and directing these programs to incorporate “green” technologies training.
Setting up $60 billion infrastructure investment bank to help fund public works.
Creating a $25 billion emergency Jobs and Growth Fund to fund other infrastructure projects.
Establishing a tax credit for companies that maintain or increase the number of full-time workers in America relative to those outside the U.S.
Giving a temporary tax credit of $3,000 in 2009 and 2010 to companies for each new full-time employee it hires in the United States.
What You Can Do: The other good news in this job market is that you have some control. Be knowledgeable about what factors may lead to job cuts to assess your risk. These days job security depends on three factors; salary, business need, and productivity. (Dickler, 2008)
Salary: Being productive alone can’t necessarily keep you safe from being laid off. Employees at every level of the organization usually fall within a defined salary range, and those at the upper end could also be targeted. When companies cut back, they usually scrutinize people at the high end of the salary range because they are more expensive and highly paid. These individuals really have to justify their worth.
Business need: Employers also take a hard look at each division or department, to find areas that can be cut without sacrificing successful business operations. In tough times, it is not unusual to see companies slashing entire departments if they are not cost effective, or dismantling divisions that are costing more money than they’re bringing in. If possible, some companies will try to redeploy some workers to other areas within the company to maintain employee confidence and retain the top performers.
Productivity: When a workforce must be cut, organizations will try to keep their best talent. Lower your chances of being cut from the team by making yourself valuable and conspicuous. This might be a good time to reconsider your flex schedule. Demonstrate that you can find ways to bring in revenue and cut costs and don’t be afraid to point out the good job you and your team is doing. To be safe, increase your networking, both inside and outside your company. Now is also the time to make sure your emergency fund is in place. Three months of expenses is standard, but if you are in an at-risk industry, sock away enough for six months to a year. (Gandel & Lim, 2008)
The Situation: With banks closing and being bought out by other banks, many people are panicked about their savings. Some people who still trust banks are pulling money out of their stock portfolios and putting them in FDIC insured accounts. Others, some older Americans who recall the Great Depression, are taking their money out of banks and stashing their cash at home, under mattresses and in coffee cans. Some are wondering, is there any safe haven left for their savings?
What’s the Good News? If we compare today’s situation with the S&L crisis in the 1980’s, experts predict that the tally of failed banks is unlikely to come close to the number we saw then. Between 1986 and 1995, 1,043 thrifts went under (keep in mind that many of them were very small). While it is hard to tell which banks will survive the financial crisis, according to Stephen Gandel and Paul Lim (2008), writing for CNN Money.com, you can “rest assured, your cash accounts are still extremely safe.”
The Treasury Department launched an insurance plan to guarantee the value of money-market mutual funds. Bank money-market accounts and CDs are typically FDIC-insured. Deposits up to $250,000 per person and per institution and $500,000 for joint accounts will be protected by the FDIC. The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009. Some retirement accounts are covered up to $250,000.
Investment banks and brokerages are also mostly protected. Unlike commercial banks, which use your money to lend to other customers, brokerages are supposed to segregate your assets from theirs. This means that if you own 1,000 shares of Disney and your brokerage collapses, your 1,000 shares of Disney stock should still be there and will most likely be transferred to another broker on your behalf. “If for any reason your failed broker can’t locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won’t be.” (Gandel & Lim, 2008)
What You Can Do: To protect your savings consider the tips offered in the “What you can do” section concerning the “Stock Market.” Also if you are seeking a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. According to Gandel & Lim “they’ve been yielding around 4% lately.”
The Situation: With the stock market plunging many people, especially older Americans, are wondering if they will ever be able to retire. If you’re retired (or will be soon), you are likely concerned with how to get or maintain a predictable income stream that’s as low risk as possible while still delivering a decent return.
What’s the Good News? If you have several years, if not decades, to go, until retirement you don’t have much to worry about. Although your 401(k) and IRAs have taken a significant hit, according to Standard & Poor’s Equity Research, history shows that you’ll make up 80% of your bear market losses within the first year of the recovery (C.F. Gandel & Lim, 2008)
If you already had a diversified portfolio, your asset-allocation strategy has probably protected you from the worst of the storm. A portfolio consisting of 70% stocks and 30% bonds has fallen around 17%, while the S&P 500 has lost more than 25% of its value over the past year. This is thanks to the gains fixed-income funds enjoyed. No one expects the economy to fix itself overnight but the other good news is that there are many ways you can protect yourself now.
What You Can Do: The first thing you can do—and this advice probably won’t come as a surprise to you—is, stay calm (read don’t panic). Your success will hinge on your ability to keep a cooler head than those about you. Even if you’re planning to retire in the next few years, with a solid strategy, there is still hope for a secure retirement.
One thing you can do, according to Gandel & Lim, is pledge to work one more year. A study from T. Rowe Price found that putting in another 365 days at the job would boost your annual retirement income by 7%. Work three years more and your retirement income could rise by 22%. By working longer, you can also delay taking Social Security benefits. For each year you put off starting your benefits between ages 62 and 70, you boost your Social Security payments by 8%. If you don’t want to—or can’t—work longer you have another option… start spending less now so that you can have have it for later. You may also want to consider re-distributing your savings for safety and income, using the technique of “laddering” your CDs. To do this, instead of parking one lump sum into one certificate of deposit, it is wiser to distribute this money across CDs of various maturities. There are two reasons for this: You’ll hedge interest-rate risk and keep cash flowing back into your hands periodically. This may appeal to you if the idea of locking your money up for years bothers you. “If rates go up, you can reinvest mature short-term CDs into higher-yielding ones,” explains Sheryl Garrett, a financial adviser, “And if interest rates go down, your longer-term CDs help insulate you from that drop.” (C.F. Money Magazine, 2008) Back to Top ^
THE REAL ESTATE MARKET
The Situation: The burst real estate bubble that started the spread of this global contagion is still bleeding. Many homeowners are struggling to make their payments and would-be sellers and buyers are wondering where the housing market is going. Many sellers want to know if there is any hope for reasonable home prices. Dean Baker, co-director of the Center for Economic Policy and Research, offers some insight. “I don’t see the slump in housing prices ending anytime soon.” (C.F. Gandel & Lim, 2008)
The takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly, helping buyers afford homes. But then the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. That has pushed home-loan rates right back up. The government bailout could help home prices if the banks that get relief turn around and make new loans, but it’s not clear yet if they will. If banks remain too nervous or broke to lend, would-be home-buyers will be locked out of the market. “If that happens, home values could fall even more, crimping confidence and putting the brakes on the economy’s greatest engine: the consumer.” (Gandel & Lim, 2008)
Furthermore, the current housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have created a housing glut with 4-million-plus homes on the market (nearly half a million more than two years ago.) That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory. Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller.
What’s the good news? Economist Diane Swonk believes that it won’t be until 2010 that housing prices will stabilize. She says, “I’m confident that they will be stable by 2010 because we are still creating a million new households a year and those people have to live somewhere.”
“In the long run, none of what we’re doing now is going to matter that much to real estate,” says Wellesley economics professor Karl Case (C.F. Gandel & Lim, 2008). “Home prices have to do with the scarcity of land and perception of that scarcity.” Now is a good time to buy a home if you can swing it.
What You Can Do: According to many experts in the real estate market, you are not stuck. Many who may have wanted to move are choosing to stay put but they are saying if you want to sell you still can. The consensus seems to be you can still make a profit; it just won’t be as large as it might have been in another market. I asked Harlene Bernstein, a (still quite busy) realtor in the D.C. Metro area for the past 30 years for her thoughts on the market and what she would advise people to do who are looking to buy or sell their homes?
What is the good news for homeowners and buyers? Harlene Bernstein: The good news for homeowners is they have a tangible asset that will increase in value when the cycle swings in the other direction as it always does. Something will happen; inventory will decrease and prices will rise. It’s like the stock market except you own and live in the commodity.
Is it a good time to buy? Bernstein: Of course it’s a good time to buy. There are good deals out there and people are willing to be flexible. Contrary to what people may think, mortgage money is available... even 97 per cent loans.
What would you tell those seeking to sell in this market? Bernstein: Houses are selling in this market if they are priced very competitively. There is so much inventory out there and a house will stand out by showing itself to be a good deal. I also recommend staging the house. It’s amazing how different and inviting a house shows with good staging.
The Situation: The credit crisis has many banks scared to lend. For months people have been hearing about (or experiencing) the credit crunch, i.e. frozen home-equity lines of credit, lower credit-card limits, and tougher loan standards. Unfortunately, this may just be the beginning. One reason regulators were anxious to step in during this crisis is the fear that consumer and business borrowing will be shut off altogether. This would further damage the economy and deepen the recession.
What’s the good news? You may very well be wondering if there could possibly be any good news in this. Well, you can take heart in the fact that for now many people are still able to get loans. “If you have good credit, job stability and low debt, there is a good likelihood that you will get a mortgage,” says Marc Savitt, president of the National Association of Mortgage Brokers. (C.F. Gandel & Lim, 2008) What You Can Do: According to a CNNMoney.com article, “In general you’ll need a 660 credit score and a 10% down payment to qualify for a loan. Another important criterion is how much of your monthly income goes to repaying all your debts. Today lenders want you to cap that at 41% of your income.” (Gandel & Lim, 2008)
So what you can do is make sure you have a good credit score. Now more than ever it is important that you don’t make expenditures that you can’t really afford and you pay your bills on time. I will discuss other personal finance tips below in the section entitled “Tips on Personal Finance.”
The Situation: According to Tamara Holmes, a journalist who specializes business and finance, “The Fed’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, based on responses from 56 banks in the United States and 21 U.S. branches of foreign banks, found that about 55% of domestic banks had tightened lending standards for commercial and industrial loans in the last quarter. Likewise, 50% of survey respondents acknowledged tightening lending standards on loans made to small firms—companies with sales of less than $50 million.” (Black Enterprise.com, 2008)
“When credit freezes up, businesses find it tougher to secure financing needed for daily operations, including payroll. That means that more companies will have to take a careful look at business operations in the current climate and make some tough decisions.” (Dickler, 2008)
What You Can Do: In this downturn, many senior executives have to make some tough decisions about resource allocation. You may need to limit expansion moves and try to rein in costs like employee benefits, pensions and health care. You will no doubt have to cut costs somewhere, but, Rita McGrath (2008), writing for Harvard Business School Publications, warns that these executives need to make a “distinction between making resource allocation decisions that necessitate some painful choices, and making decisions that fundamentally undermine the culture and values of an organization.” Often, when the bottom line is not looking good, managers who may be known to be tough and somewhat ruthless are given control over such decisions. McGrath is concerned that some of these managers are at risk for making decisions without first “really thinking through the cultural, symbolic and organizational consequences of the decisions they are making.” She advises making cuts with a “clear understanding of what makes your organization unique, what keeps your people engaged, and why customers do business with you.”
Special Advice for Small and Minority Owned Businesses In May 2008, the Feds released a report that underscored increasing difficulty that small business owners are facing in securing loans during the current economic climate. Some data suggests that it may be particularly difficult for minority owned businesses. Reginald Gates, president of the Dallas Black Chamber of Commerce, says “On average, it’s difficult for black business owners to get access to capital but when we have downturns in the economy it becomes especially hard.” (C.F. Holmes, 2008)
Without access to capital, entrepreneurs will find it difficult to “expand and even compete for some contracts that require business owners to have a designated amount of funds ready and available to perform the work.” (Gates C.F. Holmes, 2008)
What’s the good news? Getting a small business loan may be tougher than usual, but some small business experts suggest that if you can borrow and have the drive to strike out on your own, economic downturns can be a good time to start a venture. “In bad times, you may find better deals on, say, advertising and office space.” (Gandel & Lim, 2008)
The other good news is that the economic uncertainties being faced by small businesses have gotten the attention of members of Congress. Tamara Holmes, writing for Black Enterprise.com, says, “Even before the Fed report, Senator John F. Kerry (D-Mass.), chairman of the Committee on Small Business and Entrepreneurship, introduced the Small Business Lending Stimulus Act in February.” According to Kerry, the bill would reduce fees for borrowers and lenders and is designed to entice banks to offer Small Business Administration-backed loans. “The bill would also increase funding for microloans—loans up to a maximum of $35,000—which proportionately benefit underserved communities, including women and minorities, more than traditional loan programs.” (C.F. Holmes, 2008)
“Our economy works best when our small businesses are diverse and creating jobs. Up to 60% of our banks have made it harder and more expensive to get loans and even the SBA’s lenders are pulling back, which compounds the problem because SBA loans are an important source of capital for underserved communities,” Kerry adds. (C.F. Holmes, 2008)
What You Can Do: The credit crunch means businesses have to be even more vigilant about their finances. According to Roby S. Williams, president and CEO of the Black Business Association in Memphis, Tennesse, “Banks don’t finance dreams. They finance businesses that are likely to be successful.” This means that, like individuals, potential and current business owners will need to show that their companies have a good financial track record or a solid business plan. It is important to note that for smaller businesses, personal creditworthiness may also be more of a factor these days. Reginald Gates says “When you get to the smaller businesses, their personal money is oftentimes the same as the company money, so if they’re impacted personally from a credit score standpoint, it’s going to impact them professionally in their businesses.” (C.F. Holmes, 2008)
Many people are already feeling the pinch as the ripples of the banking crisis on Wall Street are making their way to the shores of Main Street. The country’s economic situation is making understanding and controlling personal finances even more crucial than ever. This is the time to be smart about spending and especially saving. Tamara Holmes, (2006) writing for Essence Magazine, suggests, “Look closely at your spending habits because there may be thousands of dollars you could save by getting creative.” Holmes suggests making a budget following the following five steps:
Consider your savings objectives – write down your goals and when you want to reach them.
Track spending – for one month track all incoming money and expenditures.
Set priorities – allocate money for priorities such as a retirement fund.
Record your plan – your budget becomes real when you write it down. Consider a program like Quicken or Microsoft Money.
Personalize your plan – tailor your plan to suit your priorities and values. Even though it may be tough in these times, it is very important that you be a pristine account holder (Burns, 2008). When you pay your bills on time you maintain a good credit score and have room to negotiate perhaps getting account fees lowered or even waived.
To learn more tips on personal finance see “Additional Resources.”
This article has outlined many aspects of the economic situation that we find ourselves in today and offered some good news and suggestions on how to increase your financial security during these tough times. In many ways, the picture is not rosy and we know that it will no doubt get worse before it gets better. If you are still fearful, don’t run from it. Face it, honor it, lean into it. This feeling is real and can tell you something about who you are.
Ask yourself what you are afraid of, what is rational versus irrational, and what you can and can’t control? One thing we can control is our attitude. Only we can make up our minds to let go of the things we can’t control and to do what we can. It is then that we can open the door to hope and step out on the path to our future. Yes, this too shall pass and we will find ourselves in a much better place. Remember, first look at your situation, understand what contributed to it, then get into action—crafting a plan to address your worries. If there is one thing we can learn from our recent presidential election, we human beings are wired for hope. Let’s tap into it.
Dickler, J. (2008, October 2). The first jobs to go: Employees are bracing for the next round of layoffs, but when the ax falls, who will be most at risk? CNN Money.com Retrieved from http://money.cnn.com/2008/10/01/pf/layoff_order/index.htm
Gandel, S. & Lim, P. (2008, October 9). What this economy means for you: As the most serious credit crisis in decades rocks your finances, you’ve got to have questions. Here are the answers. CNN Money.com. Retrieved from http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/index.htm
Moscrip, L. (2008, November 6) Jobless claims higher than expected: Number of Americans filing for unemployment insurance reaches 481,000, those continuing to receive benefits at 25-year high. CNN Money.com. Retrieved from http://money.cnn.com/2008/11/06/news/economy/jobless_claims/index.htm
Money Magazine Staff (2008, October 9). Nine tips to tough out the times: Feeling frustrated? Here’s some help for the toughening times that’ll keep paying off long after the crisis has passed. Money Magazine. Retrieved from http://money.cnn.com/2008/10/06/pf/money_steps.moneymag/index.htm
Revell, J. & Light, J. (2008, October 10). A little perspective, please: Three great thinkers—John Steele Gordon, Jeremy Grantham and Diane Swonk—on how bad things are (or aren’t) and what might come next. CNN Money.com. Retrieved from http://money.cnn.com/2008/10/10/pf/minds_over_money.moneymag/index.htm
Dr. Nicole Cutts is an author, speaker, organizational consultant, success coach, and licensed Clinical Psychologist. She earned her doctorate at the California School of Professional Psychology, LA, where her emphasis of study was Multicultural Community Clinical Psychology and a B.S. in Psychology from Howard University.
She has been a contributing writer for Identity Television, The Next Level, and The Diversity Channel, where she was also the Senior Features Editor. She has appeared on BET’s The Center, the BBC, and various radio programs. Her writings on Corporate Wellness, Success Coaching, and Diversity appear on several business websites.
She is a former faculty member in the Women’s Studies’ Department at The University of Maryland, Baltimore County. She also sits on the D.C. Bar Association Lawyer’s Counseling Committee and is on the board of the Student Support Center.
Dr. Cutts is the CEO of Cutts Consulting, LLC, a firm that delivers organizational and professional development training and coaching. www.cuttsconsulting.com
