Insights & Advice

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How This Credit Crisis Hurts All of Us

If you think you’ve dodged the sub-prime bullet simply because you own your home and are not thinking of selling, think again. The housing crisis and on-going credit crunch will increase your cost of living, threaten your job, possibly increase your taxes and put a dent in that overseas vacation you were planning.

Take my situation, for example. I have a low fixed rate home loan and in less than a year, the mortgage will be paid off. I have no plans to sell so a 20-30% decline in real estate prices over the next year or so won’t hurt me at all. Besides, over the last twenty some years, the price of my house has more than doubled so I’m way ahead. What’s to worry?

I went shopping for a new car, something with better gas mileage given the price of gas, and I discovered that auto loan rates have gone up and the application is no longer a rubber stamp. And while we are talking about credit, pay attention to your credit card rate, it’s moving up. You may have also noticed you’re not getting too many credit card offers either. In short, the price of consumer credit is climbing all over. Lenders like credit card companies and even big retail stores, spooked by the losses in the credit market, have jacked up rates. Several of the largest lenders, household names like Citibank, Bank of America, HSBC and more have announced multi-billion dollar write-offs for bad loans. In order to make those losses up, they are demanding more loan interest from you in areas outside of mortgages and want more documentation to back up the loan.

This week Citibank, after buying a retail consumer bank in the U.K, announced that they are firing a million or so of the British bank’s credit card holders. They have decided these customers are bad credit risks. However, the shocked cardholders are still on the hook for the balances they owe. Some analysts believe the U.K. is simply a test market and American cardholders can expect the same treatment in the future.

The home equity loan market is also feeling the pinch. An increasing number of consumers are either late or making no payments at all. That has the lending banks in this mega-billion dollar market nervous enough to start shutting down equity credit lines and ratcheting up their standards for new applicants.

Bottom line, I postponed buying the new car. Given that 70% of economic growth in America is derived from consumer spending (financed by debt) from people just like me, I am not surprised to see a looming recession in the economy.

A slowing economy means fewer jobs. The building and construction sector (which employs a lot of people around here) are already feeling it and the financial community is starting to see increasing layoffs as well. In both New York and Boston, Wall Street contributes a great deal to state taxes. Albany is already forecasting lower revenues from “The Street”, which is going to mean less services and/or, yep, you guessed it, higher taxes from the rest of us.

Speaking of Wall Street, have you checked your retirement savings lately? The credit crisis has roiled the global markets and last year’s returns in both bonds and stocks have been anemic at best. So far this year, well, don’t look. You won’t like what you see. The Federal Reserve, in order to avert panic, has been forced to dump billions of dollars into the credit markets as well as cut interest rates several times. All that money, while staving off further losses, has unfortunately driven down the price of the dollar to the point where many are rethinking overseas vacation. It also increases the inflation risk.

If you have filled up at a Stewart’s or shopped at Price Chopper lately you know the last thing we need is more inflation. With gas over $3 a gallon and the price of milk practically doubling, cutting interest rates right now just fuels that inflationary cycle. And yet, Ben Bernanke, the Chairman of the Federal Reserve, is between a rock and a hard place: if the credit crisis persists and the markets take an even bigger nosedive, he may have to cut rates again regardless of the inflation risk. I think that is likely.

Seems to me, that although this credit crisis is serious, I see some light at the end of the tunnel, it may linger for a while longer like a slow moving storm, but eventually it will pass. Until it does, use your head. Pay down debt; reduce spending a tad and vacation at Jiminy Peak or Stratton rather than Aspen.

Posted in A Few Dollars More, Financial Planning