How Does Financial Crisis Affect You?

By Eileen Jones - bio | email

Congressional leaders met again Tuesday behind closed doors looking for a solution to our bruised economy. A day after a huge Dow Jones drop - the stock market recovered more than half of the 770 points it lost. As the uncertainty continues, how does all this impact you and what should you do about it?

As Economist Jeff Bates answers the phone in his AUM office, he also spends a lot of his time crunching numbers, trying to figure out what the stock market is going to do and how all of that will affect us. "What's happening is everybody's gotten so scared that right now everybody is sitting on their money. They refuse to loan one to another."

And, he says when money isn't circulating through borrowing that can lead to serious troubles. "You take a farmer, during the time that they're planting and taking care of their crops, they don't have a whole bunch of money. Their reserves are very low. So, they borrow money. Once the crops come in and they sell the crops they re-pay the loan."

The same is true for some retail stores that must borrow money until they sell their merchandise and then pay off their loan, but the retailer and the farmer may be in a predicament if the economy doesn't improve.

"Well, the problem comes when they go to the bank to borrow the money and the bank doesn't have any money to loan them. What happens to that farmer? How does he then plant his crops? Well, he can't. How does that merchant stay in business during a time like this if the credit line is shut down?" says Bates.

And, he says, the financial problems don't end there because if the farmer can't plant and the retailer can't sell then the problems just get worse for everyone else. "If we're not out spending, what do these business owners do? Well, they start lying off people and once they start lying off people then those people do not have income to go out into the stores to buy."

But, he's optimistic that congress will come to an agreement before there's a complete credit crisis. "I'm not worried. I'm much more worried about what will happen if we don't pass it within a month or three months or six months from now - once these lines of credit start getting ever tighter."

Bates says a lesson to learn from this is to diversify your investments. Those Enron and MCI employees, for example, whose retirement incomes were made up only of Enron or MCI stock lost just about everything.

Additionally, Bates also says because many people are putting their retirement incomes in banks, he supports a plan announced Tuesday to increase the amount of money insured from $100,000 to $250,000.