The fallout of the credit crunch

In this post we will examine some of the likely fallout from the credit crunch. What we have seen developing in the world has shown that the international aspects of finance as well as the magnification of leverage are at the root of many of the problems. There has never been a more exciting time to be alive in the finance industry and while some pundits cite the Great Depression in every second sentence I believe that while the numbers and percentages might thwart every record hit, that the actual real economy fallout will not rival that of the Depression era.

Regulation: Regulation is likely to feature much more heavily in business, in particular in financial services, last week Patrick Neary called on all Stockbrokers to give the Financial Regulator an audit of their firms, they can do the audit themselves but they must get it done ASAP in order to demonstrate that client funds are fully protected.

In the mortgage and personal finance field we are likely to see increased regulation, the trend since 2000 has been for more and more of the advice and performance burden to rest with the adviser and not the client. This is fair on one hand but it will also hamper potential gains for other customers because it is likely that everybody will now get what we call ‘vanilla advice’, where there are only pure over the counter protected products offered. This will (in time) drive money to offshore firms who can offer more niche and risk oriented products without having to comply with the same rules as the localised players.

Unemployment: The bailouts will have to stop at some stage and this will likely mean high unemployment in the USA and this will feed through the US economy, Detroit is home to the ‘Big Three’, Ford, Chrysler, and GM. In Ireland our over-reliance on the property sector means that unemployment will also rise here and other services will suffer the knock on effect. The upside is that value for money will return to our lives, people will work for less and goods will not be as expensive.

Higher Taxes: If we are to keep 373,000 people working in the Civil Service and also support the unemployed then the money will have to be available to do that with, the only thing that can be juiced currently is the taxpayer. Property, which once yielded surpluses in the billions due to stamp duty, is not selling fast enough to keep the flow going. Ireland is expected to have to borrow up to €24 billion. All of this points to a greater need by the state for funds and the way to do this is higher tax, CGT and CAT taxes are going up, DIRT is going up to 23% from 20%, and income taxes are higher, this trend would be set to continue.

Civil Unrest: The over 70’s have marched, the teachers are doing the same, Aer Lingus threatens a strike and nobody seems pleased with their lot. This will become a more frequent feature in society however, the Government will need to learn to stand firm, if you give in to strikers once you put the power in their hands.

Inflation: At the end of the monetary and fiscal stimulation inflation will come along. People argue that after the Depression we didn’t see inflation (although you did in Germany) in the USA but remember: Rule 6102 in the USA forbid holding gold and Roosevelt devalued the dollar from $20 an ounce (which it had been for decades) to $35 an ounce, meaning they could print an extra $15 for every ounce held! The same inflation will happen to fiat currency without the benefit of forcing our loss onto other countries (such as the USA did to France when they devalued).

The big questions is this –What can I do to protect myself from financial turmoil?

The easy solution is to bury your head in the sand, and many are successfully doing this, although it won’t remedy anything, the other options is to make a plan and be prepared for any eventuality. To do this you need to consider your costs, look for ways to get some savings in place, if you have savings then don’t spend them in the short term, shop around for the best deposit rates.

Get some cover, we are not a huge fan of Mortgage Repayment Protection Plans (MRPP’s), but at a time where job losses are in the news daily it is probably a good idea to get this cover in place for a few years until this all blows over, if you never claim then be glad you didn’t get fired! People tend to not cover their income which is actually their most valuable asset – many mistakenly believe it is their house!

What other cover might be a good idea? PHI (Permanent Health Insurance) is always a good idea, Specified Illness Cover (SIC) is always worth considering and whatever you do, make sure you have adequate Life Assurance, as always don’t neglect savings!

There has never been a time in the last thirty years where solid financial advice is more vital, we are emailing and calling all of our clients to talk about doing forensic reviews of their finances so that they are protected from ‘worst case scenarios’ (we, like you, hope that many of the downside risks are never realised but we still take reasonable steps to mitigate them).

If you have not already gone through your finances with a fine toothed comb then call us on 01 6790990 and arrange an appointment, because if you do get into financial difficulty it is usually at the point where you are too late to do anything about it.

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