A New Economic Order
Molina & Co
04 April, 2009
By: Rodrigo Julio Molina Ortega
Tips to deal with the world economic crisis
The crisis began in the United States with foreclosures. For many years, the value of properties had been rising steadily. During this bonanza, requirements for credit loans were relaxed. In order for banks to lend more, they pooled together or combined mortgage loans with financial instruments called mortgaged-backed bonds. These were sold in the financial markets to other banks, pension funds, insurance companies and investors.
The problem surfaced when property prices ceased to go up and, in some cases, started to drop. When the value of properties went down, many people realized that they owed more money to the bank than the value of their property and, therefore, stopped paying their mortgages. The owners of these debts panicked and started to sell their bonds, which caused a stampede of bond sales.
These famous bonds are bought and sold as any other product (tomatoes, homes, cars). Even when backed by mortgages, the law of supply and demand rules over the value of these bonds, and since supply exceeded demand, their value plummeted.
Now then, the owners of these bonds are obliged to match the value of these bonds in their accounting records to their value in the market. Having purchased them at 100 dollars and having to set a much lower value, the difference translates into a loss that has to be reflected in the profit and loss statement.
The problem grew so much out of proportion that it started to affect the banks that did not have these Bonds. The growing uncertainty as to the outcome of the crisis has made banks raise the cost of loans among themselves. They have lost confidence in each other and have therefore stopped loaning money to each other. As a result, other financial institutions have gone bankrupt, infected by the initial problem.
Mistrust rules at world level. As the saying goes “fear makes the wolf bigger than he is”. And as in many countries faced with any kind of crisis, the “just in case” position can blow any crisis out of proportion. This is basically what is happening. The fear of many investors is making the crisis spread like a global virus.
Governments all over the world are taking action to halt the economic downturn and to reassure people as well as companies. First and foremost, the main concern is to reassure people that their savings are safe in case their bank files for bankruptcy. World governments are reassuring people by guaranteeing bank deposits or, as in other countries, by increasing the amount of the insurance on bank deposits (US$250,000.00). This is done to prevent people like us from withdrawing all of their money from the bank and keeping it under the mattress!
WHAT CAN WE DO?
1. Protect your job. This not only implies having the right attitude when going to work but also ensuring the company’s continuity. Be more efficient, don’t waste time surfing on the net. Strive for excellence.
2. Cut back on personal expenses. It is important to review your personal expenditures. Keep it simple and be frugal. Try not to spend on things you really don’t need.
3. Save as much as possible. This has become even more important due to the uncertainty we are currently experiencing.
4. Keep your money in the bank. Keeping your money under the mattress, with a friend or in some savings bank does not afford any guarantees.
Reduce your debts as much as possible, especially those having a variable interest rate. I’m referring to personal credit cards. Interest rates are going to increase.
The faster you can pay off these credit cards and personal debts, the better. Interest rates will go up. Don’t pay the minimum shown in your statement.
Review the interest rates that you are paying on your debts
Understand the difference between using a credit card and becoming indebted with a credit card. The first case entails using the credit card and paying off the balance at the end of the month. The second case consists in using the credit given by the bank or the store. There is no cost involved in the first case, whereas the second case involves the payment of interest.
Credit card and store cards are a huge temptation. Don’t take out any new ones and, if possible, pay off some of them. You will be able to take out new ones in the future.
The contrary is true for mortgages at fixed rates. At this time it is better not to make any advanced or higher payments, but to save the money.
DO pay your house on time. This is your most important asset.
DON’T give into those “no-interest months” promotions. I worry about this form of marketing used by many stores to sell more. People don’t “feel” the bill immediately so they are more inclined to buy.
The only way not to have to pay interest is by paying off the balance shown in your credit card statement each month. Few people do this and banks make a lot of money this way. If you don’t realize that buying items this way is equal to having the amount of the monthly fee taken out of your salary during those months, it will cost you interest.
Be careful about lending to other people. It is quite common for friends or relatives to ask you to loan them money. If they do, ask for some kind of warranty. This person could be drowning and could take you down with him/her if you are not careful.
Stay Healthy. Getting sick costs money. Go on a diet, lose weight, exercise, lower cigarette and alcohol consumption.
Talk to your family about this. It is important for your spouse and your children to understand this.
In our companies, we ALL need to do the following:
- Take care of clients. We need to focus on good service and that goes from good customer care to taking care of their money (save them unnecessary storage, take care of merchandise, be sure to return any balance in their favor, etc.)
- Collect money faster. Payroll is paid from what is collected.
- Finance less. Those of us who have commitments and obligations can’t afford not to meet them, but let’s try not to contract new ones for now.
Reduce expenses as much as possible:
- Telephone, power, stationery
- Study thoroughly any investment.
- Protect the company’s assets (cars, photocopy machines, computers, etc.)
- Sell more. Let’s invest in acquiring new clients and in selling more to those we have already.
It is uncertain how long the world crisis will last. What is important is to first understand why it happened and then to learn the lesson. Also, don’t allow scaremongers to affect you and your decisions, be they journalists or people close to you.
We need to take steps, both personally and company wise, to preserve and guarantee the continuity of our source of income.
If the American government is going to buy all the toxic assets from banks, one must logically infer that Panamanian realtors must be wise enough and lower the square meter of all empty apartments in order to sell them as quickly as possible and not be affected by the position assumed by the G20. Jurisdictions that have committed to the internationally agreed taxstandard, but not yet substantially implemented (grey)
Martinelli: “We must make it very clear to the G20 that we are not a tax haven. Presidential candidate Ricardo Martinelli said yesterday during a trip to Veraguas that Panama must set the record straight at the G20 Summit of April 2nd in London and insist that this is No fiscal paradise. He affirmed that the government and entrepreneurial associations agreed to send a message rejecting Panama’s inclusion in that list, which could be detrimental to our economy. As an example of the controls that currently exist, he said: “Bank formalities to open a savings account are never-ending”.
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