Outlook on Current Credit Crisis

With the troubled U.S. economy causing credit lines to dry up at banks, there is an increasing level of concern over the time it will take for the U.S. economy to rebound. During this crisis, Gary Dvorchak, CFA, explains strategies for surviving lean budgets and how to recognize forthcoming signs of economic improvement for the U.S.

Dvorchak, a partner and portfolio manager at Aviance Capital Management, LLC., has worked in the investment advisory business for the last 18 years. During this time, he's observed economic dips and has gleaned wisdom for financial survival.

He describes the current credit crisis as "at its most basic level, banks and other lenders have lost confidence in general business conditions and the ability of their customers to repay loans. Banks that would normally be loaning to home buyers, car buyers and the like suddenly decide to hoard their capital. Once credit stops flowing, the economy comes to an almost grinding halt."

With the seriousness of the market's problems, some economists are predicting a move from the current recession into a depression. Dvorchak says, "this one is quite severe...at least equal to or worse than the big recession of 1973-74. In the Great Depression, thousands of banks failed, unemployment went to 25 percent, and GDP contracted by nearly 30 percent. It is hard to fathom that we would experience a similar contraction today, simply because there are built-in stabilizers to prevent this from happening again. For instance, FDIC insurance means depositors won't lose their savings, and this prevents bank runs, which were a big problem back then. Also, the government is intervening with massive bailouts, at a level much greater than the interventions in the 1930s."

Healing of Time

With all of the government bailouts being planned, experts are divided on what the cure will be for the market's recovery. "The main thing we need now is time," says Dvorchak. "A lot of money was lost in the mortgage market, as people overpaid for overpriced homes, and speculated on now-bankrupt condo developments. Those losses will need to be absorbed and business slowly rebuilt. There is also the question of whether more debt can solve a problem of too much debt."

One strategy for stabilizing economic situation is to change spending habits. "We need to become a nation of savers, rebuilding our retirement savings and creating a more solid financial foundation in the future," says Dvorchak. "This process of building savings will take time, and the economy will need to adjust to a lower level of consumption in the near term."

On the Horizon

While economists search for the answers to solve the current dilemma, individuals looking to stabilize their own finances can start practicing a new method of purchasing. "If you have a credit line, it probably won't get closed (although that is happening to some), but new credit will be hard to obtain," says Dvorchak. "People will need to contemplate becoming cash customers and saving for big purchases rather than putting them on payments."

With all of the gloom of the current market, Dvorchak says that individuals can look to two indicators to see where the economy is heading. "The stock market will be an early indicator," says Dvorchak. "If the market stabilizes, then starts rallying for a sustained period of time, that will be a good indication better times are ahead. The stock market may also signal a worsening economy. The value of the dollar against other currencies is also a good indicator; if the value of the dollar starts to fall, more sour economic times may be in the near future."