I have been following the bail out plea of the Big Three automakers of Detroit for quite a while now. Ford, General Motors and Chrysler, iconic brands of the American car industry are now in the brims of bankruptcy with government bailout being their only option for survival. As some one who has driven and owned some of their cars and as a fellow American it pains me to see the CEO’s of these companies mumbling lame answers for questions raised by the Congress. But much of this is their own making.

Even as their ideas of making gas guzzling cars in these days of fluctuating oil prices became a subject of debate, the CEO’s of the companies also came in for much criticism for flying in private jets to Washington to seek bailout for their companies from the Congress. That brings us to the question of austerity and cost cutting measures adopted by the CEO’s in their personal front, when they axe hundreds and thousands of jobs in the name of cost cutting.

There seem to be very few CEO’s who lead by example when it comes to implementing real cost cutting measures and austerity. The CEO of Japan Airlines for instance was in the news recently for taking a salary cut, making his pay much lower than what his pilots take home. The CEO slashed his pay to $90,000, something that most American middle level managers take home. And what a joke it was when the CEO’s of the Big three said that they will henceforth take home only $1 as their pay.

Having said that I should also add that it this seems to be the case only with the large corporations. I am sure new entrepreneurs and small corporations are feeling the heat of the recession even more due to their size and possibly inexperience in tackling such crises head on. And when it comes to survival, there does not seem to be much difference between the GM’s and Ford’s of the world and these small ventures. Like this entrepreneur’s experiences that he states in the ‘First time CEO’s recession survival guide’, you won’t own all the proceeds if the company succeeds, but you’ll certainly own a failure in its entirety.

The large corporations atleast have a well established board, wise bankers and investors advising them on handling recession. And most of these corporations have been there, done that and fairly know how to sail through the crises. But for entrepreneurs and first time CEO’s this is an acid test and a time when Darwin’s theory of ‘Struggle for existence and survival of the fittest’ really comes into play.

Call it sadistic pleasure, but it sort of makes me happy to know that whether the CEO of a Ford, GM, a new corporation like Redfin or an ordinary person like me, the recession hits us all and is a great equalizer that way.

The impact of the economic crisis facing the country has started trickling down to lay persons like us. I was speaking to my sister Samantha over the phone just a while ago which actually prompted me to post this blog. Samantha works in an IT company which has just announced its plans to lay off employees. Thankfully she does not feature in the firing line. But she was worried that any time soon, it could be her turn to be shown the door.

There are many reasons why companies lay off employees. When the economy was bullish orders were flowing in big and fast and companies needed people to execute the work. Now that there is a slowdown, orders start dwindling in size and number and in effect the requirement for the human resource also goes down. To add to the misery of the companies banks have started restricting loan disbursal to businesses or charge higher interest rates due to the liquidity crunch, throwing a spanner in the development plans of companies. These are just two of the many reasons why jobs are laid off.
It is important to be prepared for the worst in such times and let me suggest how:

1. Start creating an emergency fund
Traditional wisdom suggests that one has to save around 3 months of one’s salary as an emergency fund. If you have not done it so far, it is not too late to start doing it. Check all the possible ways in which you can save money. It is ok if you do not spend your weekends at the mall or hangout for a beer with friends for a few weeks, at least until you have saved up a decent sum for your emergency needs.
 

2. Get mentally prepared
As much as the financial preparation, it is important that you mentally prepare yourself for the worst. The emotions of people getting laid off range from anger, guilt, low self-esteem to a feeling of helplessness. Understand that when you are in a boat and the stream is rough you just have to sail along. No point finding faults with your boat or cursing your fate. Remember there are things beyond your control. Just keep telling yourself that it is just an opportunity for your to realise how tough you are as a person.

3. Start networking
Even as you are still in your job, rummage through your phone book, revive old contacts, make calls to people who matter, just to say hello. Let people remember that you are still around. You can subtly hint them that you are looking for a change in job. You can also start circulating your resume among friends and job sites.

4. Prioritize your debts and investments
Make a list of the debts and loans to be paid off and prioritize them. By paying your secured loans like mortgage and car loans regularly you can ensure that they are not seized for non-payment. Try not to default on your insurance premium payment either; else the whole purpose of having a policy will be lost. And avoid breaking your 401(k) or retirement plan as much as possible. Withdrawals from your retirement plans are subject to taxes and a 10% penalty as well.

 

 I am sure all you chums out there know by now that the country is going through a very serious financial crisis, unless you have been on a long sleep like Rip Van Winkle of the fairy tales. The economists and financial analysts worth their air time have been comparing this to the Great Depression of the 1920’s. So what exactly happened during the Great Depression of the 1920’s when almost none of us were born and how does the present situation compare with that? Let me explain.  

Wikipedia says that the Great Depression of the US started in 1929 with the stock market crash followed by a decade of unemployment, poverty and low economic growth. Though the reasons for the Great Depression (let me refer to it at GD, henceforth) are not certain, it is believed that it was caused by a combination of bad loans, badly regulated markets that also resulted in financial misappropriation by banks and financial institutions. The impact of the failure in financial markets was felt in other sectors like farming, construction and manufacturing. The financial crises snowballed into a global phenomenon as other countries also felt the impact of the GD.

Check that with the current situation- bad mortgages, subprime woes, layoffs, rising levels of unemployment and skyrocketing prices. History seems to be repeating itself. The ripples of the current economic slowdown have already reached Europe and parts of Asia. So going by how things worked during the GD, does that mean the worst is yet to come for us?

Not exactly, say the financial experts. First the government and the regulators have been swift in reacting to the financial distress as compared to the GD when they were largely mute spectators. The US Federal Reserve’s $700 billion bailout package is certainly a debatable decision but what cannot be denied is that it has insulated the banking and financial system from a large depression. As for the financial security of individuals, it is taken care of with programs like Social security and unemployment benefits, which are actually the results of lessons learnt during the GD.

Another difference between then and now is that the GD was sandwiched between World War I and II leaving little time and resources for the economy to limp and hop back to normalcy. The situation is different now, though few economists point fingers at the presence of American troops in Iraq and the precious resources required to station the troops there.  

The slowdown is certainly affecting us, no doubt. The stocks that we have invested have tumbled, our bank deposits interest rates have dwindled, prices of essential goods are rising and getting a loan may be a bit more difficult in the days to come with the threat of layoff and job cuts also around. But the past lessons learnt have helped the common people and the establishments to be better prepared to handle the situation. Economies always have the boom and bust cycle. The bust has just begun and we just have to keep our fingers crossed for it to pass off soon.

The country’s economy seems to be going to the dogs. Whenever I switch on the television or pick up a newspaper all I get to see are the images of those bespectacled, intellectual looking economists and financial experts hollering about the economic crises describing it with terms ranging from ‘a financial catastrophe’ to ‘the largest after the Great Depression’. The announcement of bankruptcy by the 158-year-old securities firm Lehman Brothers and AIG’s bailout by the Federal Government has shaken the confidence of the country, for sure.

What does this mean to an average American like me, who has been paying taxes regularly, has a little amount of savings and investments here and there and a few loans to pay off. Will this mean all my savings will be eroded or that I need not pay back my loans, with the government’s decision to bail out the large investment firms? I was confused.
I sharpened my ears and eyes a bit to really understand what’s going on around me. From what the experts and analysts suggest and from my own little experience, these are my learning’s on how to handle the situation now.

1. Don’t act in haste
There is no need to panic and liquidate all our investments now, unless we need that money desperately. If the horizon for your investment is five years or over, it is then wise to forget about the funds invested in the bonds or stocks now and wait for things to improve. The bulls and bears keep coming in cycles. So if there is a slowdown now, then an upside is to follow certainly. So just wait and watch. Senior members close to retirement could consider realigning their financial portfolio to invest in inflation protected securities and single premium immediate annuities (SPIAs) with the help of qualified financial analysts.

Also if you follow the news carefully, you will realize that the holding company of Lehman Brothers was only filing for bankruptcy. Which means investors and customers of the group’s mutual fund unit, Neuberger Berman and the asset management unit are clearly insulated from the crises. Likewise Bank of America’s buyout of Merrill Lynch only means that the customers of the latter will now have account in a different bank.

2. Take stock of your situation
What people usually tend to do during such situations is either panic and liquidate all assets or just shut up and sit idle until things become better. What you can also do is have a re-look at your financial portfolio, analyze your debts, assets, risk appetite and the like. It makes sense to talk to a financial analyst, explain your goal, income, expenses, horizons and future plans. The analyst who has a hang of the current situation will be able to suggest plans to utilize your funds better and sail through the situation. Websites like moneyStrands also help you in giving a precise picture of your financial situation that will aid in better decision making.

3. Look out for other modes of investment
Okay the stock markets go yo-yo, interest rates on deposits go down, credit card rates and other consumer loan interest rates are up. But there are still some traditional forms of investment that are largely insulated from these global phenomena. Investment in precious metals like gold and silver makes sure that your investments are largely safe from such financial breakdowns. The yellow metal’s price has been on the rise over the last few years and it makes sense to add it to your portfolio now. You could also try buying foreign currency, what with the value of the dollar sliding.

4. Don’t abstain from repayment of loans
Just because the Federal government has assured a $700 billion bailout for financial institutions it does not mean you do not have to repay your car loan or your mortgages. It doesn’t work that way and your bank wouldn’t spare you either. Abstaining from repayment will only affect your credit ratings negatively. So the next time you approach a bank or a financial institution for a loan, you will be asked to pay up a higher interest rate for your loan, or worse still you wouldn’t be sanctioned a loan at all.

5. For the extreme risk takers
If you have a high risk appetite and do not mind taking a chance you could consider buying homes that are being foreclosed or auctioned because of non-repayment of loans by buyers. If there is a house that you missed buying because of lack of funds at the time of selling, or it is in a locality which you like, or if it has become more affordable now, then this is a good time to invest in the property.

You have to be extremely careful in checking the papers to make sure that the person selling the property is the first buyer. Else you will have two or more mortgages to pay back. The rules for such purchases differ from state to state. You could check the local courthouse to see if there are any houses coming up for auction or foreclosure, you could then consult your attorney to check the papers and the rules to follow. Do not act in haste but exercise extreme caution when making such purchases.