September 12th, 2009 11:00 EST
Is The Worst Behind Us?
I never liked to be the bearer of bad tidings, but I can tell you with near certainty that everything that the media is telling us is nearly opposite from the truth. I don`t see signs that the recession is over. I see that people are loosening up and I see that people are getting used to the situation that the country is in. I see people spending more money, and I see companies hiring people. But those are all just smoke screens that are blanketing the truth.
The real issues boil down to the fact that there is still an enormous liquidity crisis in our country, and it is now about to attack every American family. It`s been very difficult for most of us to understand what a liquidity crisis means at the level where the banks operate. What this actually means is that the banks don`t have enough money to lend and their ratios are all out of whack. But that has very little to do with Joe Consumer on Main Street.
The reality for the liquidity crisis is now hitting the mainstream with full force. Not only have there already been terrible layoffs, but this "letting go" of employees actually tends to accelerate at the end of a recession. So by the time the government starts to report that the recession is over, the companies that have been hanging in there by their fingernails may lose their grip and cause their employees to go down the drain with the company.
But here`s what the liquidity crisis has to do with those of us on Main Street. About six or nine months ago, the banks immediately began to re-assess the value of the real estate in their portfolio. That meant that all of us who borrowed against our homes and had mortgages with banks got an internal re-assessment by the lenders who carry our mortgages.
For those of us who had home mortgage lines of credit, or home equity lines of credit, most of them were immediately slashed down or "crammed down" to the level that we had borrowed against them. That meant that if you had a $250,000 line and you had zero borrowings, the whole line might have been shut down under the bank`s logic that your home had probably lost more value than that. If your line was $250,000 and you had borrowed $200,000, the bank might have shut you down to the same $200,000, thus eliminating all of your availability. Many families who were intending to use these dollars to pay for college tuition and for other valuable expenses suddenly have nowhere to turn, partly because their savings and investments have also plummeted.
The next wave of the cram down occurred at the level of the credit cards. You may have a perfect track record with your credit card companies, but the credit card companies are worried that too much is outstanding in our economy and none of them want to be shackled with the likely number of personal bankruptcies that are on the horizon. (By the way, my bankruptcy attorney friends tell me that this is the worst wave of bankruptcy activity that they`ve ever experienced and that the nature of the debtors who are coming into their offices is more distressed and more distraught than ever before seen in their careers).
So as the credit card companies attempt to mitigate the risk of borrowers, every time a payment is made creating a small amount of availability on credit lines that are generally over-used, banks are making re-evaluations of those lines. And once you free up $1,000 or more, somehow that availability mysteriously evaporates. And a few days later, you might get a letter from the credit card company indicating that "we`ve made a new evaluation and have determined that it would be in everyone`s best interest to reduce your overall credit line." Therefore you have no availability despite the fact that you had just freed up $1000.
The impact of the credit card companies taking away all of our availability and of banks taking away all of our mortgage credit is compounded by the limited amount of cash that most people have around in their savings accounts and checking accounts. A lot of people are right up against the wall. I know many people for whom a broken air conditioner would throw them over the edge. A car breakdown might not be fixable if they don`t have access to credit or cash to get the repair done. A lot of people are right on the edge and if someone has to fix their car to get to work and then potentially doesn`t get their mortgage paid, you can begin to see the impact of these activities.
As the credit card companies crunch us down more and more and our liquidity or available cash gets to be less and less, you can see that trouble looms on the horizon with even greater impact than we`ve seen so far. And if someone is on the edge should lose their job or if they should be furloughed for a few days and not get paid all the dollars that they expect, even a small reduction in pay could cause problems. And then, they fail to pay their landlord. Then their landlord might be running on empty and that person can`t pay their bank, which in turn causes more foreclosures and more disaster to occur.
"So Joel, don`t just make us feel bad, give us an action plan."
OK. Here it is:
I hate to be a naysayer, but now is the time to hunker down. Save your cash. Make the absolute minimum payments on credit cards and other debts, because your cash will continue to be king. And it is your cash that will help you to survive what`s on the horizon right now.
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About Joel G. Block, President of Growth-Logic, Inc. Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and faculty member of the iLearningGlobal community.
To bring Joel into your company, please visit http://www.joelblock.com or http://www.growth-logic.com. Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship -- http://www.entrepreneur-hub.com. And finally, for film makers: http://www.hollywood-dream.com/ and http://www.filmfundingblog.com -- our newest projects.