Changes are blowing in the economic winds

Doug Horn

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters. Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

While the recession of 2008 and 2009 has not been declared over, it clearly appears to be near its end. However, I believe it is just beginning for changes to be taking place in the financial services world. What does this mean to the average investor and citizen of the U.S., maybe nothing, and maybe everything.

As we all know, when the pendulum swings too far one direction, when it reverses direction is often does the same when corrections are being applied. Since the Government provided funds to many businesses, the opportunity to know what would have happen had it not done so is lost forever. In my personal opinion, I believe much of the action taken by the governments across the globe assisted in minimizing the chaos that had been created. But at the same time, we had the sitting President as well as the newly elected President both warn the American public that if action is not taken by Congress, another Great Depression could occur. These warnings by both Presidents killed consumer confidence and our recession deepened severely. Just remember the lack of retail activity during last October through March. The ability to accidently bump into a fellow shopper did not exist. During that time it seemed store personnel out numbered shoppers.

Now that the financial markets appear to be functioning closer to a normal range and business is resuming activity although for many, at a very slow pace, we are starting to see some of the changes that may be on their way. Clearly, higher fees are being imposed. Due to the losses by both SIPC and FDIC, the brokerage firms and banks are paying higher fees to replenish these two agencies. And because of the magnitude of the impact this recession has had on the agencies’ reserves, the increase and duration of the fee increase will have a significant impact for years. And we all know, for profit businesses are just that, in business to make money and when expenses go up, their revenue must also increase in order to maintain their own profitability; and in this case, the consumer will be paying these fees. I suspect, finding free checking accounts will be more difficult, or higher balances will be required. The occasional disclosures found in monthly statements should be reviewed as these will be telling the future with regards to the fees that will be charged by the financial institutions.

Recent headlines have also stated that the Pay Czar will be cutting the compensation level of many employees at the firms that have not repaid the funds they received during the crisis. For some, this is an “about time” action. For me, it makes me wonder where the Government will stop. I believe we are dancing on the edge as many of our politicians want to display their toughness against as industry perceived as being corrupt. While many may disagree with me, I believe the crisis we have endured was not caused by one firm or industry, but there were actually many contributors to the failures that occurred. The speed of the recovery now may depend upon the amount of new federal controls/regulations, which will add costs and barriers for new businesses to start.

The housing industry needs to help lead us out of the recession, but this may not occur without new lending. The same is true for small businesses, without the source of additional capital or lending many businesses will fail or continue to contract rather than grow. Recently I heard the Treasurer of Arizona speak candidly about the economy and one of his concerns was the lack of lending.

Banks lend a multiple of their capital. During this recession, many regulators are insisting the banks maintain lower loans to capital ratios. To achieve this, existing loans must be paid down or the banks increase their capital. To add to this problem, the value of some of the capital many banks use has been reduced in value due to the lack of a market. This also forced many banks to seek additional capital, either from private sources or from the government in order to shore up their asset base. Thus, the cash injected into many banks was needed to support existing loans and capital requirements, and was not available for new loans. Until this situation is corrected, the economic recovery may be slower since the engine that runs so much of our economy, loans, will not be running at full steam. Investments should be allocated in anticipation of this recovery taking longer than average and the many changes that may be in store.

For help with managing investment assets, contact me at Quality Financial Concepts or one of the other Certified Professional Planners in our area. To continue a personal quest for education, you can also view our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.

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