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Financial Storm: How to Survive Economy
[link widoczny dla zalogowanych]ay the most serious crises are affecting almost everyone. Some lost lots of money, savings, 401K and other investments. Seems like in January we noticed something was wrong. But no-one expected closures of banks, Dow Jones jaw opening loses and other negative economic turmoil which is still not over.
During September more events occurred as the government's seized Fannie Mae and Freddie Mac and rescued American International Group; than the bankruptcy of Lehman Brothers and pending sale of Merrill Lynch, a series of bank sales; and a federal bailout plan that could carry a $700 to $900 billion price tag.
Economy:
While everything seemed so perfect in this power machine of money, something did go wrong. In 2001 right after the internet bubble, Fed was afraid we will go to recession,[link widoczny dla zalogowanych], so therefore, their response was to slash rates all the way to 1%.
This opened another door. Mortgages with 1% introductory rates, adjustable rate mortgages, interest only loans were introduced as "getting you into a loan fast" in most cases, without any qualifications such as taxes, pay-stubs, etc.
Wall Street investors got even better idea of creating tradable bonds from those risky mortgages, mix them with some other loans with a good rating and sell them. Bond rating agencies provided a very high rating on those mortgage bonds.
Than, subprime homeowners start to slowly default on mortgages and banks were racing to raise capital by borrowing more money from each other or Federal Reserve.
Everyone is to blame here; everyone is pointing fingers at each other whose fault it is. Maybe it is banks fault of providing ARM loans, maybe it is customer fault of not clearly understanding ARM loans or maybe it is bond rating fault of providing an excellent rating on loans that may go to default.
Where can we go from here?
Corporate profits are already on the verge of falling for a fifth straight quarter. People are afraid what will happen to their money, some are already taking money out and keeping it save someplace else.
Companies that have seen slowdown had to lay off workers, close businesses as credit market got worse. But still outside of finance market and housing, economy is strong.
The weak dollar is boosting demand for our goods abroad and we might expect a mild recession that ends next spring. Growth should happen in 2009 as Fed is pumping billions into market and banking system.
Of course, that all can change if banks will remain scared of credit market and stop lending or allow lending only for selected borrowers. If that happens, home values could fall even more, crimping confidence and Wall Street will respond in negative way.
Higher Taxes?
Who ever wins the presidency you would have to pay higher taxes. As of this moment it is hard to tell what final bill of $700 billion rescue plan will be. Some estimated at $900 billion, some go over a trillion dollars.
If the economy continues to move into a deeper recession, dragging the housing market along with it, then the costs to the taxpayers easily could move even higher.
Savings
Your savings are protected; there is no doubt about that. Bank money-market accounts and CDs are as protected as well. Even though banks may still go down, your money are FDIC insured.
For investments such as 401K plans make sure your plan is diversified. You don not want all stock 401K at this time. Also consider stable value funds as they have yield of 2%-4%.
Deposits up to $250, 000 per person per institution and $500, 000 for joint accounts will be protected by the FDIC.
Stocks
If you own 500 shares of Apple and your broker collapses, your investment is still there and will be most likely transferred to another broker. If government seizes a certain bank, your automatically loose all your investment. Look what happened to Washington Mutual. There were many speculators when Washington Mutual started to gain share again only that one day Fed seized the whole bank and all investments were gone.
Your stocks,[link widoczny dla zalogowanych], bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.
Insurance
If your insurance suddenly goes bankrupt, which is most unlikely. AIG, American Insurance Group went bankrupt because AIG insurers mortgage bonds. But AIG received $85 billion loan guarantee from federal government.
However you do have a protection. If you have an outstanding claim when your insurer fails, a state guaranty fund will cover it. The rules vary, but funds typically pay up to $300, 000 in claims on most policies.
With variable annuity you are protected because you are investing in a mutual like fund held in your name and insurance companies by law cannot touch that when they go bankrupt.
For most other insurance, typically you have 30 days to find another insurer. If you have up front a large sum, you can apply for a refund from your state insurance fund.
Real Estate
The new bailout plan includes few things. First government was trying to buy out bad mortgages and when Wall Street did not responded well, Congress looked in to Europe, especial into UK where government injected funds directly to banks. This plan is currently being worked at with direct injection of funds; this should prompt banks to lend again.
But this may not help real estate because home prices have to do with the scarcity of land. Homes for sale are again scarce and it will lower price tag of your home by another 10%-20% by next year. Key currently is to get loans so new buyers will come to market and thus increasing prices of homes.
Credit
You may have heard about credit is frozen, tight credit, tough mortgage standards. You can still get a loan of you have at least 660 score, low debt, and 10% down payment. But what if you do not.
Banks are no longer willing to lend people with bad credit. They are afraid you will not repay the loan back. With direct injection from government should allow banks to make more loans even if you have some small bruises on your credit.
Jobs
In this tough financial time, more employers are staying away from hiring employees. Employers would rather save money at this time so they can continue operations.
Make sure you have you savings ready at this time. It is recommended that you should have at least three months of emergency savings. Sure, there are plenty of jobs available,[link widoczny dla zalogowanych], but remember that many people are applying for the same job positions. Nowadays,[link widoczny dla zalogowanych], maybe even more than before if a company is laying people off, you can be certain those employees will start to look for jobs right away.
When will market recover, How will I know?
Pay attention to London Interbank offered rate or LIBOR. The lower it is, the greater the likelihood that banks are willing to lend freely. Historically LIBOR is really close to Fed Funds rate which stand at 2%. Currently LIBOR fluctuated between 3% - 6% which means banks still see a huge risk in the market. Susan Duey represents RateTake Refinance marketplace. RateTake matches consumers with multiple lenders offering low mortgage rate quotes. RateTake also operates #1 American MortgageTopics related articles：


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