Worried Banks

The New York Times featured an interesting but alarming article today titled “Worried Banks Sharply Reduce Loans”.  The writer talks about how the current housing crisis has caused banks to shift gears and act overly cautious about lending in many different markets, even to those who are typically considered low risk.

This is something that I think is going to cause further problems related to the U.S and global economies (in addition to the mortgage/housing mess, the decline of the dollar and record oil prices). The banking industry is only starting to get its share of the limelight, with the problems of IndyMac, Fannie Mae, Freddie Mae, Bear Stearns, Washington Mutual, First National and others.

The main purpose of banks is to safeguard account holder funds and loan money in the form of credit to various organizations and individuals. While I think that credit is way over used on a large scale, reducing credit to businesses that have opportunities to grow can have serious ramifications. Banks are now having to pay for their mistakes even though the consequence at this point is only to fall into a safety net of the U.S. Government (funded by taxpayer dollars). I think we will start seeing a contraction of the economy when banks realize they can’t loan money out to anyone with a pulse and any business that has a bank account.

This should be a wake up call for all. The banking industry has had its run and it was run with greed.

I’ve normally been very bullish on the economy during the past five to ten years, but the events of the last year have been alarming, and my sentiment as to the market and the economy has changed for the worse. While I am still long with stocks in my brokerage account, Roth IRA, and my life insurance investments … I’ve started to hedge my bets with things like money market savings, cash savings, taking possession of gold and silver and investing in food storage.

I don’t care we if haven’t met the definition of a recession or not … all news and signs point to a recession that is growing in severity.

It’s not that I am insistent that a major crash is coming, but if one were to come, this is the time.

I’m just following the mantra of “hope for the best and prepare for the worst”. This is a safeguard approach, I don’t think it’s time to sell stock and empty bank accounts. Actually now is a better time to buy stocks compared to this time last year (buy low … sell high), but I think we are still to see the bottom, a bottom I think we won’t reach at the earliest, later this year but it could be as long as 2010. It doesn’t hurt to pick up stocks on the way down, you can’t predict the absolute bottom until it passes. Just realize that you might have to take some scary losses to make serious gains, patience is truly a virtue in this situation.

In an upcoming post I’ll talk about gold, food storage and other things that people can do to prepare for the worst if they do go that way. It is important to keep a positive attitude and not make irrational decisions at this point. There are ways to prepare for the worst without loosing much (or anything at all) if things actually turn up for the better and that is what I’m hoping for.