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Tips to prepare for a looming credit crunch

May 15, 2023

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In March, Federal Reserve Chair Jerome Powell expressed concern that in the wake of banking sector turmoil, households and small businesses could experience a credit crunch. An April survey from the New York Fed suggests that this crunch has already begun.

Whether it’s already happening or looming on the horizon, Straight Arrow News contributor Larry Lindsey has some advice for borrowers navigating the challenges of tighter lending standards.

What should you do? Well, it comes back to basic prudence, the kind of stuff you knew you’re supposed to do all along, but not many people do.

First, it’s always a good idea to have cash in the bank, money market funds, or a savings account or a checking account that you can spend easily, equal to two to three months of your spending. Now that’s a lot, most people aren’t there, but that’s a classic precautionary move in case there are periods like this.

Second, you should be sure to pay down your high interest credit cards if you possibly can. Well, that assumes, of course, that you have extra money, and a lot of people are living paycheck to paycheck. We all feel like we’re living paycheck to paycheck but if you really take a close look at your spending, I’m sure there are some things you can cut out. You should entertain at home and cook at home rather than go to a restaurant. It’s about as third as costly to cook at home as to go out. You might want to think about that vacation, maybe spend it closer to home, have a lot of family time, go to some local parks, what have you, instead of traveling somewhere. Or you might look around for a second job or maybe even a higher paying new job. Don’t rush into a completely new job though. Your current job likely pays your health benefits and those are very valuable.

Also, keep in mind that this crunch, if it develops, is likely to be temporary. People in this country, we’ve lived well, we’ve actually lived beyond our means — that’s why we’re having to borrow from foreigners — and now we got to pay the piper. It’s as simple as that.

This will not be the first credit crunch in your life and it will not be the last. Time now to get prepared for that next one, go back to basic prudent household management, get some money in the bank, pay down your high interest credit cards and learn to live within your means. 

The word credit crunch has been in the news a lot. Sounds pretty scary. I mean, anything getting crunched is never a good idea, particularly if you’re a borrower. And you might be worried about whether or not you can access credit or not. Well, let’s put some things in perspective. And also to think about steps you can take. First of all, let me start off with some good news. The problems in the banks are really not as bad so far, at least, as the headlines might make them appear. As of the end of April, commercial and industrial loans at the nation’s banks fell from about 2.8 trillion to 2.76 5 trillion, that’s not very much, it’s about a 1%, decline. collateralized or real estate loans actually went up a little bit. That’s one area of concern. Meanwhile, what funds those deposits? Well, they fill a lot at small banks, they dropped by about 8%. Or let’s call it $300 billion. But that drop seems to have ended at the end of March. And since then, deposits, even small banks have been relatively stable. Remember, deposits fund loans. So we want to make sure that there are enough deposits to cover the nation’s loans that are banks. That’s really not a problem. As of the end of April, deposits of the nation’s banks were 17 point 2 trillion loans were just 12 point 1 trillion. What banks did with the rest of the money, the other 5 trillion, let’s say, is to hold securities, particularly government bonds. Now, it’s usually a good idea for banks to hold such securities, they’re good to meet their capital requirements that the regulator set. They’re also good to meet liquidity requirements that the regulators set. So let’s just imagine that banks want to have at least 20% of their balance sheets be made up of these securities. Even if that were true, the bank still have 2 billion more of deposits than they will need for loans. Excuse me, that’s $2 trillion more than they need for loans, little difference there between billions and trillions isn’t there. That’s six times as much money, as has already left the banks in terms of deposits. And those deposits are leaving largely because they get much higher interest rates elsewhere. banks pay about half a percent. Government Bonds money market funds pay closer to 5%. So that’s why people are leaving, there really doesn’t seem to be the causes for credit crunch. Well, now the bad news, first of all, more banks are going to run into trouble. If you’re a depositor, I wouldn’t worry, the government has made sure that you will get your money back. But this drip drip drip of more bank failures is not going to be good for the markets. What we’re having really is a series of tremors, but not a major earthquake, you should realize that money is going to get more expensive. However, the Federal Reserve the federal government deficit, believe it or not, consumes more than all the personal savings and corporate savings in the United States. To fund our government to fund our investment to fund our houses. We rely on the kindness of strangers, otherwise known as foreigners. They’re becoming more and more reticent to lend to us. So there’s going to be a squeeze on the money, available money to be borrowed in the United States. Well, money is rationed. Its ration by price, like everything. And the price of money is interest rates. So interest rates are going to keep going up. What should you do? Well, it comes back to basic prudence, the kind of stuff you knew you’re supposed to do all along, but not many people do. First, it’s always a good idea to have cash in the bank, money market funds, or savings account or a checking account that you can spend easily equal to two to three months of your spending. Now that’s a lot not most people aren’t there. But that’s a classic precautionary move in case there are periods like this. Second, you should be sure to pay down your high interest credit cards if you possibly can. Well, that assumes, of course, that you have extra money and a lot of people are living paycheck to paycheck. We all feel like we’re living paycheck to paycheck. But if you really take a close look at your spending, I’m sure there are some things you can cut out. You should entertain at home and cook at home. Rather than go to a restaurant. It’s about as third as costly to cook at home as to go out. You might want to think about that vacation, maybe spend it closer to home, have a lot of family time, go to some local parks, what have you instead of traveling somewhere, or you might look around for a second job or maybe even a higher paying new job. Don’t rush into a completely new job though. Your current job likely pays your health benefits and those are very valuable. Also, keep in mind that this crunch, if it develops is likely to be temporary. People of the country we’ve lived well. We’ve actually lived beyond our means. That’s why we’re having to borrow from foreigners. And now that we got to pay the piper it’s as simple as that. This will not be the first credit crunch your life and it will not be the last time now to get prepared for that next one. Go back to basic prudent household management. Get some money in the bank, pay down your high interest credit cards and learn to live within your means. 

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