Last week the major central banks (Canada, U.S., U.K., European) joined together to inject a large amount of cash (approximately $40 billion) into their various financial systems. This was the response to the ongoing credit crisis sparked by the U.S. sub-prime lending problems. The initial reaction of the markets was joy. That joy lasted about an hour or two.
The result of the credit crisis has been that (a) banks are not willing to loan to other banks; (b) large banks (such as Citicorp) have had to be bailed out by government interests (in Citicorp’s case, it was the Saudi government that “bought in” to Citicorp); (c) banks are less likely to extend credit to individuals and business; and (d) it is only a matter of time before the banks start to take harder lines on their loan portfolios and increase their enforcement activities. It is because of this that the central banks injected the money in the system to “loosen up the purse strings”. I’m not convinced that it will work.
For the past several years, money has been thrown at individuals and businesses like it was free. It looks like the time is coming when people may have to start paying the piper. Lawyers are notoriously slow at realizing which way the wind blows. It was very interesting to see that the Canadian Bar Association’s Ontario branch was having a “refresher course” for lawyers on mortgage enforcement. Even the lawyers have finally started to realize that foreclosures will be rising in number. So, once again, I find myself, like in my May 15 post, crying out for people to talk with their bankers.
The year is almost over. It’s time to start thinking about preparing your year-end financial statements and getting things in line for 2008 (if you have not done so already). I am doing the same thing as you are. Once my financial statements are done, just like last year, I will be giving a copy to my bank account manager. Why? Because this year (thankfully) has been a pretty good year and it has carried on the trend set in 2006. Will 2008 be as good? I certainly hope so, but it’s just as likely to be a bad year. In dealing with bankers, they like to look at trends. Who knows what 2008 will ultimately bring, but if I can show my banker that I’ve got a good trend going it might give me a little slack in the event that things start to go downwards over the next year.
Talking with your bankers and your creditors now can help you to prepare for any bad times which might befall us. I would hope that I am preaching to the converted, but experience tells me that I am not.