Crisis http://www.wisebread.com/taxonomy/term/9202/all en-US Does Your Business Need a Crisis Response Plan? http://www.wisebread.com/small-business/does-your-business-need-a-crisis-response-plan <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/articles/does-your-business-need-a-crisis-response-plan" target="_blank">http://www.openforum.com/articles/does-your-business-need-a-crisis-response-plan</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/does-your-business-need-a-crisis-response-plan" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000015215413Small.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Just a few weeks ago, I was working in my home office when the whole house began to shake. It may have seemed minor to anyone who has lived in California, but an earthquake with a magnitude of 5.8 is a big deal for those of us on the US east coast.</p> <p>Many businesses sent their employees home, either because they wanted to check their buildings for potential damage or because those employees needed to deal with personal matters, like picking children up from the many schools that closed.</p> <p>A week later, a hurricane swept up the same coast. That led to more downtime for businesses that needed to batten down the hatches and, in many cases, make repair afterwards. There was more warning for the hurricane than the earthquake, but it was still tough for many businesses to handle.</p> <p><strong>The Big Problem is Planning</strong></p> <p>The simple truth is that, as business owners, most of us are focused on building our businesses. We can be so busy working on the opportunities in front of us that we often forget to do any contingency palnning. In fact, at the time of the <a target="_blank" href="http://www.bizforum.org/whitepapers/kamer.htm">9/11 attacks</a> only 19 percent of CEOs reported having a crisis management plan in place, according to PRWeek. But that sort of planning is absolutely crucial.</p> <p>There&rsquo;s no way to plan for <a target="_blank" href="http://www.openforum.com/idea-hub/topics/money/article/insurance-overview-for-small-business-owners-1">every eventuality</a>, but there are a lot of generalized responses that you can put together. In the process of creating a crisis response plan, you may spot some weaknesses in your business&rsquo; operations that you can take steps to fix now.</p> <p><b>Categories of Catastrophes</b></p> <p>Think in terms of categories of potential issues, rather than every possible permutation. That will you will have options that you can adapt to different situations. After all, what you need to do in the event of a blackout will be different than what you&rsquo;ll need to do in the event of a full-fledged evacuation. Where possible, you might want to consider preventative steps you can take, as well.</p> <p>There are plenty of companies that specialize in handling every aspect of crisis management, from prevention to recovery. The price tag can get a little steep for a small business owner, and it is certainly possible to put together a plan for your business without those companies&rsquo; guidance, provided you can invest some time in the process.</p> <p><strong>The Crises Worth Planning For</strong></p> <p>There are plenty of natural disasters that could potentially strike your business, to the point that it can feel absolutely overwhelming to start planning. A more manageable approach can be to think in terms of what you actually need to operate your business&mdash;and what you would need to do if you had to go without.</p> <p><b>Make a List</b></p> <p>You can start by just making a list of what you use every day in the course of running your business. Dig down deeper than just the obvious, though: if you boot up your computer, you&rsquo;re not just using your computer. You&rsquo;re using electricity, an internet connection, software, and perhaps even some web applications.</p> <p>Don&rsquo;t forget to think about a crisis that might remove <em>you </em>from the equation. If an employee or one of your family members had to step in and handle your business for you, having a plan in place they can follow&mdash;typically referred to as a continuity plan&mdash;is crucial. The same goes for the employees who work for you. Especially if you work with a remote team, a team member may be unexpectedly unavailable, for days or even weeks.</p> <p><strong>Documenting Your Crisis Response Plan</strong></p> <p>Keeping your crisis response plan in your head is a sure way to make managing a crisis harder. If a hurricane is headed your way or you just rode out an earthquake, you&rsquo;re going to be stressed&mdash;ask anyone living in the Mid-Atlantic region. You&rsquo;re bound to forget at least a few details.</p> <p>With a written set of guidelines, you can respond quickly. A checklist is nice, especially in situations like an evacuation, when you may have to do a lot in a very short period of time.</p> <p>Be sure to have multiple copies of your plan available, in multiple locations. Storing it on your laptop is great&mdash;but what happens if the battery runs down and you can&rsquo;t recharge? For once, this is a situation where electronic tools shouldn&rsquo;t be your main choice. Sure, you should keep a couple of copies on different computers and in the cloud, but you absolutely need to print out a couple of copies as well.</p> <p>You&rsquo;ll find that it&rsquo;s worth running drills, as well, even if it&rsquo;s just you in the office. Practicing the steps you&rsquo;ll need to deal with a certain situation can help you find potential problems in your plan. Solving such issues now means one less thing to worry about in the event that there&rsquo;s real trouble. You may also notice opportunities for preventing certain situations: even something as simple as setting up off-site backups for your computer files can save your bacon in the event that a crisis wipes out your desktop or laptop.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/thursday-bram">Thursday Bram</a> of <a href="http://www.wisebread.com/small-business/does-your-business-need-a-crisis-response-plan">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">The 5 Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-things-you-need-to-do-now-to-prepare-for-winter">9 Things You Need to Do Now to Prepare for Winter</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-safest-cities-in-america-from-natural-disasters">10 Safest Cities in America from Natural Disasters</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/3-ways-to-fund-your-business-without-touching-savings">3 Ways to Fund Your Business Without Touching Savings</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Small Business Resource Center Crisis crisis planning disaster planning disasters natural disasters small business Thu, 22 Sep 2011 21:49:01 +0000 Thursday Bram 705939 at http://www.wisebread.com How To Plan For A Crisis http://www.wisebread.com/small-business/how-to-plan-for-a-crisis <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/articles/how-to-plan-for-a-crisis" target="_blank">http://www.openforum.com/articles/how-to-plan-for-a-crisis</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/how-to-plan-for-a-crisis" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000015215413Small_0.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Bad weather, a devastating earthquake and chemical or industrial accidents can cost you plenty&mdash;even put you out of business&mdash;if you aren't prepared. But properly handled, &quot;That which does not kill us makes us stronger,&quot; as philosopher Friedrich Nietzsche put it.</p> <p>Ultimately, a crisis can be an agent for change&nbsp;that leads to increased flexibility and&nbsp;adaptability, and can help reduce the impact of future crises. Planning for, and management of, a crisis is possible.</p> <p><strong>Crisis planning</strong></p> <p>Preparing for the unknown may sound like a futile exercise, but you need to plan for how you will continue to operate, or temporarily shutdown in an orderly way, regardless of the problem.</p> <ul> <li><strong>Systems:</strong>&nbsp;How will you keep automated systems operating, and create manual backups when you can&rsquo;t?</li> </ul> <ul> <li><strong>Infrastructure:</strong>&nbsp;How will you maintain infrastructures ranging from electrical supply to supplier deliveries?</li> </ul> <ul> <li><strong>Public</strong>&nbsp;<strong>Relations:</strong>&nbsp;What is your public relations plan that communicates that you are aware, in control, and doing something?</li> </ul> <p>For example, do you have a call ladder? You call two people, each of them calls two people, and in 10 steps, over a 1,000 people can be in personal contact. You can use the concept for employees, suppliers and even customers.</p> <p>Training and simulation are keystones in disaster planning.</p> <p><a href="http://training.fema.gov/IS/crslist.asp" target="_blank">Federal Emergency Management Agency</a>&nbsp;(FEMA),&nbsp;<a href="http://www.redcross.org/portal/site/en/menuitem.d8aaecf214c576bf971e4cfe43181aa0/?vgnextoid=58d51a53f1c37110VgnVCM1000003481a10aRCRD&amp;vgnextfmt=default" target="_blank">American Red Cross</a>,&nbsp;<a href="http://www.ncdp.mailman.columbia.edu/crlccourses.html" target="_blank">The national Center for Disaster Preparedness</a>&nbsp;through Columbia University, and the&nbsp;<a href="http://www.bt.cdc.gov/" target="_blank">Center for Disease Control</a>&nbsp;all offer free disaster planning courses online.</p> <p>Training isn&rsquo;t enough, though. The maxim that &ldquo;practice makes perfect&rdquo; is true. Unless you test your plans, you really can&rsquo;t be sure they&rsquo;ll be effective.</p> <p>NASA has a telework program, for example, that&rsquo;s an integral piece of their Continuity of Operations plan. So periodically, they declare a simulated emergency and designated telecommuters sign in from home.</p> <p><strong>Crisis management</strong></p> <p>When the worst does happen, you have to manage both the actual problem and perceived problems. Communication can be either the solution or the problem.</p> <p>When a murderer added cyanide to Tylenol capsules, killing seven, Johnson &amp; Johnson pulled $100 million of product off shelves and their CEO appeared on TV to explain what they were doing. Sales quickly returned to pre-crisis levels.</p> <p>On the other hand, when toxic gas escaped from a Union Carbide plant in Bhopal India, communication breakdowns before, during and after the disaster only made matters worse. Crisis plans and emergency instructions were only available in English. Senior executives were put under house arrest and cut off when they arrived in India.</p> <p>Management and staff blamed each other, records were changed in a massive coverup. Amazingly, sabotage was found as the probable cause, but popular reporting was allowed to ignore that &ldquo;virtual certainty.&rdquo; Twenty-five years later, the company is still struggling with repercussions including fines and even jail terms for two executives.</p> <p>The bottom line: make communication a priority. Even when it's tempting to ignore phone calls while putting out the &quot;figurative or literal&quot; fire.</p> <p><strong>Crisis recovery</strong></p> <p>Properly handled, you can benefit from a crisis. Besides offering the opportunity for examination and change, a&nbsp;<a href="http://www.nrf.com/Attachments.asp?id=12546" target="_blank">study by the University of Oxford</a>&nbsp;found that post-crisis stock prices on average increased by 5 percent for the companies that were prepared. Companies that fumbled lost as much as 15 percent.</p> <p>Good management can be more effective than insurance in mitigating the impact of a catastrophe. Your business shouldn't fail because Mother Nature is acting up or a man-made disaster occurs.</p> <p>Create a crisis management plan that&rsquo;s appropriate for your organization. Test it. Refine it. Communicate it. And use it when the time comes, because it will come. Even as this is written, there&rsquo;s another hurricane headed for the East Coast.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tom-harnish">Tom Harnish</a> of <a href="http://www.wisebread.com/small-business/how-to-plan-for-a-crisis">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/do-you-need-a-disaster-survival-kit">Do You Need a Disaster Survival Kit?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/figuring-the-size-of-your-emergency-fund">Figuring the Size of Your Emergency Fund</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-emergency-situations-you-must-prepare-for-and-5-you-can-ignore">5 Emergency Situations You Must Prepare For (and 5 You Can Ignore)</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/when-to-use-savings-to-pay-off-debt">When to Use Savings to Pay Off Debt</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-to-do-and-not-do-when-youre-in-a-car-accident">What to Do (and Not Do) When You&#039;re in a Car Accident</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Small Business Resource Center catastrophe Crisis earthquake emergency hurricane Thu, 01 Sep 2011 20:39:40 +0000 Tom Harnish 713546 at http://www.wisebread.com Surviving a financial panic -- lessons from the past http://www.wisebread.com/surviving-a-financial-panic-lessons-from-the-past <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/surviving-a-financial-panic-lessons-from-the-past" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/panic_0.jpg" alt="Don&#039;t panic" title="Don&#039;t Panic" class="imagecache imagecache-250w" width="250" height="292" /></a> </div> </div> </div> <p>Financial panics used to be quite ordinary.&nbsp; In the century or two prior to the great depression, there was a panic every 15 or 20 years.&nbsp; Since the great depression we haven't had a classic financial panic, until now.&nbsp; There's a thing or two that we can learn from panics past to help us survive the current one.</p> <p>To begin with, there's a reason why we haven't had financial panics for the past 75 years--fiat currency.</p> <h2>Panics and gold</h2> <p>Panics used to begin when people decided to get their hands on actual, physical gold.&nbsp; That could happen for a lot of different reasons.&nbsp; Often it was because there had been inflation--banks issuing bank notes far in excess of the gold they had on deposit--and people decided that they didn't trust their bank.&nbsp; Sometimes, though, it happened without any particular malpractice by the banks, simply because there was a demand for gold someplace else--an economic boom in Europe or South America could drain gold from the United States or vice versa.</p> <p>Since issuing banknotes was <strong>literally</strong> printing money, the temptation to go overboard was immense, and individual banks that did so used to collapse all the time.&nbsp; A prudent bank, though, could be modestly profitable and a great boon to its community, but in a panic, even prudent banks would fail.&nbsp; (You could, in theory, create a panic-proof bank that held enough gold to pay off every banknote, but it would be a money-losing institution.&nbsp; Holding all its gold in its vaults, it would be unable to make loans, but would still have to pay for a building, tellers, security, and so on.)</p> <p>Prior to 1933, it was very hard to address a panic, because there wasn't enough gold.&nbsp; Sometimes, if a panic started small, it could be headed off by large banks (or even wealthy individuals) lending gold to the banks that were under pressure.&nbsp; The banks could then redeem enough banknotes to satisfy worried note holders.&nbsp; When the panic subsided, gold would flow back to the banks, they could pay off the loan, and things would return to normal. &nbsp;</p> <p>In the case of a large panic, though, the banking system as a whole didn't have enough gold to redeem enough of the banknotes.&nbsp; Banks would pay out gold for a while, hoping that they could thereby demonstrate their soundness.&nbsp; Once it became clear that the gold on hand wouldn't satisfy the demands of note holders, the bank would suspend note redemption.&nbsp; Note that, even when that happened, depositors and note holders didn't necessarily lose everything.&nbsp; In many cases, the bank was actually solvent.&nbsp; As their customers went on paying their debts, gold would gradually flow back to the bank, allowing it (at some point) to resume redeeming its notes.</p> <p>Since 1933, there hasn't been any gold backing the banknotes anyway, a condition that had seemed to have eliminated the possibility of a classic panic.</p> <p>And yet, here we are.&nbsp; So, what were the keys to surviving a panic in those days, and how do they apply today?</p> <h2>Liquidity</h2> <p> The first way a panic works its harm is by destroying liquidity.</p> <p>Once a panic started, the first things to go was the payments system.&nbsp; In normal times, people could spend banknotes as easily as they spent gold and could pay their bills with checks.&nbsp; In a panic that isn't true.&nbsp; Every transaction becomes its own negotiation.&nbsp; Payment in gold is fine (although you have to be sure it's real gold).&nbsp; Payment in the notes of a sound bank is okay, but opinions differ regarding which banks are sound and which aren't, leading to confusion and disagreement--the result is a whole sliding scale from the sound banks to the iffy banks to the banks that have suspended redemption of their notes but are still open to the banks that have closed.&nbsp;&nbsp; Checks have the same issue of bank soundness, only it's layered on top of the question of whether or not you've got money in your account.</p> <p>Adding that sort of negotiation on top of every transaction was obviously a nightmare.&nbsp; So, if you want to understand why central bankers, finance ministers, and politicians are in such a tizzy, imagine layering those issues on top of the complex payment systems that we use now. &nbsp;</p> <p>Today, checks are clearing, credit and debit cards work fine, the ATM machines have money, direct deposits are going through on schedule, automated clearing house payments for bill payments and bank transfers are all working smoothly.&nbsp; This is a huge win for the economy.&nbsp;&nbsp; Just imagine what happens if those systems start to break down--if your transfer from your internet bank doesn't show up in your local bank, if your credit or debit card starts being declined, if your landlord and the power company stop taking checks and start wanting you to show up in person with cash in hand.</p> <p>If it was just liquidity, though, the problems would be manageable.&nbsp; Cumbersome, but manageable.</p> <h2>Solvency</h2> <p> The second way a panic works its harm is by destroying solvency.</p> <p>As a panic began to set in, a business with merely adequate capital could suddenly find itself on the ropes.&nbsp; Its customers would start paying at the last possible moment, and then start paying late (and, in many cases, going bust and not paying at all).&nbsp; At the same time, its suppliers would start cutting credit limits, pressing for early payment, and then demanding payment in cash.&nbsp; On top of that, its <a href="/whats-the-big-deal-about-banks-refusing-to-lend">bank would refuse to lend</a>.&nbsp; If you had the cash to bridge the gap--paying your bills on time, even though people were paying you late--then you were fine.</p> <p>It wasn't that simple, of course.&nbsp; If your bank failed it didn't make much difference how much money you had.&nbsp; The wealthy could take measures--dividing their money among several banks and holding some amount of physical gold for example--but those strategies were largely closed to the poor (who couldn't scrap together enough for one bank account, let alone two, and who didn't have a safe place to store gold even if they&nbsp; could put their hands on some).&nbsp; They were also largely closed to businesses, who had their money invested in the business, not sitting around just in case their customers started paying late the very same week their suppliers started demanding payment in cash.</p> <p>The key, then, to surviving a nineteenth or early twentieth century panic was to have ample cash, to choose your bank carefully, and to have some actual physical gold on hand.&nbsp; In particular, being one of the first people to panic--showing up to turn your banknotes into gold while the bank was still paying in gold--was the winning strategy.&nbsp; The result was bank runs that could bring down even sound banks.</p> <p>Since there's deposit insurance to protect small and medium-sized depositors--and since there's no gold at the bank to be gotten anyway--we do seem to have largely eliminated bank runs, and largely eliminated the need for ordinary people to participate even when there is one.</p> <p>Still, the solvency issues remain--if customers can't pay, even a well-capitalized business can't continue to operate for very long.&nbsp; And, as businesses cease operations--or simply shrink to the point where they're sized to service the fraction of their customers who can pay--employees find themselves out on the street, facing their own solvency issues.</p> <p>And solvency issues are why, even though they're not obliged to back deposits with gold, the banks are failing.</p> <h2>Our new panic</h2> <p> Even sound banks can fail in a panic, if they're obliged to pay out gold, simply because there isn't enough gold in the system to pay off all the banknotes at once.&nbsp; Since our banks aren't obliged to pay out gold, sound banks aren't really at risk--even if they don't have cash on hand to pay off all their depositors, as long as they have assets (generally, loans that are being paid back), they can get unlimited cash from the central bank.&nbsp; In this situation, what would have been a panic is merely a <a href="/credit-squeeze-formerly-know-as-a-panic">credit squeeze</a>. </p> <p>So, how come banks are failing in our current panic?&nbsp; Basically, a lot of the banks aren't sound.&nbsp; Their assets, instead of being mortgages on local homes and loans to local businesses, are instead huge amounts of the sort of &quot;securitized&quot; debt that you've no doubt heard about--groups of mortgages, auto loans, credit card debts, and so on, all packaged up and divided into slices that were supposed to have predictable risk characteristics (but that turned out not to).</p> <p>Presumably, not all the banks are in trouble.&nbsp; So, a second problem is that nobody knows which banks are solid, which banks are iffy, and which banks are just waiting for the coroner to sign the death certificate.</p> <p>(That's why the Treasury's plan was to buy up a large amount of this securitized debt.&nbsp; The idea was, if you could put a price on those iffy securities, the sound banks could resume normal operation.&nbsp; If the price was high enough--higher than the assets are really worth--many of the iffy banks would be okay as well.)</p> <p>The result has been a situation a lot like a classic financial panic, even without the issue of a shortage of physical gold.</p> <h2>A few words about gold</h2> <p>In panics past, the key winning strategy was to move to gold before banknotes lost all their value.&nbsp; I don't think that's a useful strategy this time.&nbsp; Gold may be a winning investment, but it lacks the key attribute that made it a winner in the past:&nbsp; it isn't cash.</p> <p>Until 1933, contracts were often written in terms of gold dollars.&nbsp; If your banknote wasn't backed by gold--if your bank had closed or suspended payment--you couldn't use it to pay your bills.&nbsp; That's no longer true.&nbsp; The value of the dollar may soar or crash in terms of its international value and it may lose its value slowly or quickly to inflation (or even gain value due to deflation).&nbsp; But you can be reasonably sure a dollar will continue to be worth a dollar when it comes to paying your bills.&nbsp; That's something that people didn't have going for them in the panics of the nineteenth and early twentieth centuries. </p> <p>Gold may (or may not) be a great investment, but it's a crappy way to pay your bills.&nbsp; For that, you need money--regular old bank deposits and currency.</p> <p>The hard money folks like to say that gold is the one financial asset that isn't someone else's liability.&nbsp; In a world where many liabilities are not being honored, that's a big deal.&nbsp; But as long as your liabilities are in dollars (or euros or pounds or krona), you want to have cash on hand to pay your bills.&nbsp; For example, I'm just three months into a one-year lease.&nbsp; I know exactly how many dollars I need to pay to keep my apartment for the next nine months.&nbsp; I have no clue how much gold I'd need.</p> <p>As an aside, it seems that there actually is a shortage of physical gold.&nbsp; Perhaps in part because a rather new fund (SPDR Gold Shares) has been buying huge amounts of gold and storing it in vault--enough that its gold reserves recently passed those of Japan.&nbsp; Fabricators of gold coins&nbsp; are having trouble getting their hands on enough to meet demand.&nbsp; That's a situation that can't last for long--people will bid up the price of physical gold high enough to draw those large gold bars out of the vaults.&nbsp; That makes gold sound pretty good as an investment--but it doesn't turn it into cash.</p> <h2>Strategies for survival</h2> <p> Knowing that the keys are liquidity and solvency, there are some obvious strategies to begin with.</p> <p><strong>Don't depend on credit.</strong>&nbsp; Arrange your finances so that you can fund everything with cash.&nbsp; If you're a business, this will inevitably make you less profitable, but less profitable is better than being out of business.</p> <p><strong>Keep your assets safe.</strong>&nbsp; Even if you avoid debt, you still have obligations that need to be met--rent, taxes, utility bills, etc.&nbsp; If your income is uncertain (and it is), then you want to have cash on hand to meet those obligations.&nbsp; Things like bank deposits (under the insurance limits), money market funds <a href="/update-on-money-fund-guarantee-program">(now also insured)</a>, and <a href="/treasury-bills-for-ordinary-folks">Treasury securities</a> are very safe and very liquid.</p> <p><strong>Cut expenses and diversify your income.</strong>&nbsp; Having liquidity is key in the short term, but over the medium to longer term the key is to make sure that your expenses don't exceed your income.<br /> <strong><br /> Later, buy valuable stuff cheap.</strong>&nbsp; As the panic winds down, large amounts of valuable stuff will be on sale cheap, because those who were not liquid enough will be forced to sell.&nbsp; If you've got cash at that point, you're in a position to make some outstanding investments.</p> <p>These were the strategies for surviving panics in the past.&nbsp; They're still the strategies today.&nbsp; The one good thing about a financial panic is that it (unlike, say, a war) doesn't destroy the actual productive capacity of the economy.&nbsp; The factories are still there, workers are still there, the land is still there.&nbsp; Staying liquid, and making sure that your expenses don't outstrip your income, will get you through to where that underlying productive capacity can come to the fore once again.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/surviving-a-financial-panic-lessons-from-the-past">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-choose-a-financial-planner-yes-you">How To Choose A Financial Planner - Yes You!</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/whats-the-big-deal-about-banks-refusing-to-lend">What&#039;s the big deal about banks refusing to lend?</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/learn-good-financial-habits-from-your-parents-or-not">Learn good financial habits from your parents. Or not.</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/download-the-451-page-bailout-proposal">Download the 451-page bailout proposal</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-ways-to-decide-if-its-a-fund-worthy-emergency">8 Ways to Decide if It&#039;s a &quot;Fund-Worthy&quot; Emergency</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Crisis financial panic Mon, 13 Oct 2008 13:44:45 +0000 Philip Brewer 2513 at http://www.wisebread.com Download the 451-page bailout proposal http://www.wisebread.com/download-the-451-page-bailout-proposal <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/download-the-451-page-bailout-proposal" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/64368770_7bce91daf6.jpg" alt="tired of reading" title="tired of reading" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Well folks, I hope you have plenty of time on your hands. The initial 3-page document that Bush and Paulson put forward has grown somewhat. It&#39;s hardly surprising, considering how much of a broad sweep the initial bailout plan was. However, you have to wonder how many people out there have the time, patience and understanding to read a 451-page economic document. But, if you want, you can download it right here. </p> <p>Simply <a href="http://freepdfhosting.com/16d96dd8b2.pdf">click this link </a> and you should be prompted to save the entire document to your computer. For those with slow connections, this could take a while. But certainly nowhere near as long as the monumental read that awaits you. A document like this could hide all sorts of legal loopholes and technicalities, so I hope there are plenty of non-partisan economists looking through this for the sake of every American taxpayer. Happy reading.</p> <p><em>Note: This PDF was current at the time this article was published. These days, an hour is a long time in politics. </em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/paul-michael">Paul Michael</a> of <a href="http://www.wisebread.com/download-the-451-page-bailout-proposal">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/looking-on-the-bright-side-how-to-find-a-silver-lining-in-the-current-financial-crisis">Looking On The Bright Side: How to Find A Silver Lining In The Current Financial Crisis</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/could-the-last-person-to-leave-america-please-turn-out-the-light">Could the last person to leave America please turn out the light.</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/do-we-really-need-help-in-getting-more-debt">Do we really need help with getting more debt?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-be-ashamed-to-be-on-public-assistance">Should You be Ashamed to be on Public Assistance?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-overdraft-protection-racket-why-banks-want-you-to-overdraw-and-how-you-can-get-your-money-back">The Overdraft Protection Racket: Why Banks Want You To Overdraw, And How You Can Get Your Money Back.</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Consumer Affairs Credit Cards bailout Crisis Economy government Wall Street Wed, 01 Oct 2008 19:08:03 +0000 Paul Michael 2483 at http://www.wisebread.com What's the big deal about banks refusing to lend? http://www.wisebread.com/whats-the-big-deal-about-banks-refusing-to-lend <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/whats-the-big-deal-about-banks-refusing-to-lend" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/men-on-bank-steps-1.jpg" alt="Men sitting on the steps outside a bank" title="Men on Bank Steps" class="imagecache imagecache-250w" width="250" height="194" /></a> </div> </div> </div> <p>Anybody--but especially frugal people--can be excused for thinking that the whole credit crisis thing is being overblown.&nbsp; After all, we get along without debt.&nbsp; In fact, we strongly recommend that others do so as well.&nbsp; If getting along without debt is the way to go, why make such a big deal over a credit crunch?</p> <p>For an individual, there's a reasonable debt-free path to some sort of prosperity.&nbsp; You earn money, you spend less than you earn and save the difference.&nbsp; Over time you accumulate durable items that raise your standard of living for years to come; your income rises (as you become more skilled and prove yourself a reliable worker); you earn a return on your savings and investments.</p> <p>So, what's the big deal?&nbsp; If everybody did that, we'd hardly need credit at all, and could just ignore credit squeezes.&nbsp; Right?</p> <h2>Consumer debt</h2> <p>That intuitive analysis really just covers consumer debt, which is not at the heart of the matter.</p> <p>Consumer debt is a factor in the crisis, in that it has let people live beyond their means.&nbsp; That has produced an illusory boost to the economy, even as it has produced a shortage of savings.&nbsp; But a cut-off in consumer credit is not what people are worried about when they say that banks have quit lending (even thought it's enough all by itself to produce a recession, simply because consumers who had been borrowers will have to become net savers, if only because their access to credit has been cut off).</p> <h2>Productive debt</h2> <p>The shortage of credit that has everyone in a tizzy is <strong>credit used to buy productive assets</strong>.&nbsp; When a farmer borrows money to buy seed, that's productive debt.&nbsp; When a baker borrows money to buy a second oven, that's productive debt.&nbsp; When a huge utility borrows money to build a power plant or a water treatment facility, that's productive debt.</p> <p>It's possible for farmers, businessmen, and giant corporations to get by without debt--but only as much smaller operations.&nbsp; So, there are two issues:&nbsp; the size of the enterprise, and the transition to being that size.</p> <h3>Enterprise size</h3> <p>WIthout access to debt, business size is limited by the amount of invested capital:</p> <ul> <li>The farmer can't plant more seed than he can afford to pay cash for (after budgeting for fertilizer, fuel, and so on). &nbsp;</li> <li>The baker finds himself turning away good customers because his one oven can only produce so much (until he saves up enough money to buy a second oven--something that might take years).</li> <li>The utility can't expend to serve a growing population (except by retaining a decade's worth of profits).</li> </ul> <p> This is not necessarily a bad deal for the business, if the enterprise is sized correctly.&nbsp; The baker with just one oven can only produce so much bread or pizza, so he only has to work so hard.&nbsp; Since demand is strong but supply is limited, it's possible to earn a good profit.&nbsp; You often see this sort of result in highly skilled crafts--a well-thought-of luthier might have an order book that extends out for months or even years.</p> <p>When credit is available, this sort of situation doesn't develop, except for things like skilled crafts.&nbsp; Credit makes it possible for the business to expand.&nbsp; And if the business doesn't expand, competitors will move in to meet the demand.</p> <p>When credit is tight, this sort of situation can persist for years (which can be very frustrating for customers, who can't buy what they want--because the guy who makes it is selling all he can produce to long-time customers).</p> <h3>Transition</h3> <p>Before we get to the tolerable (if sometimes frustrating) situation of businesses staying small even when there's strong demand, we have to get the businesses sized correctly.&nbsp; That can be terribly painful.</p> <p>Many businesses are utterly dependent on ready access to credit.&nbsp; This is especially true of businesses with large capital demands, such as farms (where huge amounts of money are tied up in land and equipment) and utilities (where the capital takes the form of power plants, telephone switches, well fields, pumping stations, water towers, etc.), but it can be true of any business.</p> <p>With much or all of their capital tied up in plant and equipment, the business uses credit to buy supplies and to meet payroll.&nbsp; If access to credit is lost, even for a couple of weeks, the business is no longer a going concern--invoices go unpaid and the payroll can't be met.</p> <p>That's even true of a business that's not really operating on the edge.&nbsp; A successful farmer, for example, might have enough cash to finance his whole operation--buy seed, fertilizer, fuel, pay for maintenance, and so on--for a year.&nbsp; But suppose a poor crop this year leaves him with less cash next year.&nbsp; Unless he has access to credit, he can't make full use of his land and his equipment.&nbsp; If he's only able to plant and fertilize half his fields, he can easily enter a death spiral, never making enough money one year to make full productive use of his capital the next.&nbsp; In theory he could downsize the farm--selling some land, selling a big combine and buying a smaller one, etc.--but that sort of transformation is hard at the best of times and can easily be impossible in any particular year, especially if his neighbors are in much the same situation.</p> <p>Other businesses face exactly the same sorts of issues--needing to sell equipment that they can't put to productive use because they lack the cash to buy raw materials, pay their employees and so on.&nbsp; But they too can't actually do so, because nobody else has the cash or the access to credit to buy the equipment.</p> <h2>Current situation</h2> <p>I mention all this because we're dangerously close to this situation now.&nbsp; Many businesses are unable to borrow.&nbsp; If this continues, they'll be forced to try to shrink--and many of those efforts will fail.&nbsp; Even where they succeed, the new business will be smaller--with fewer employees, less output, and lower profits.&nbsp; They (and their customers, and their suppliers) will all be buying less, meaning that other businesses--even ones that don't depend on credit--will have to shrink as well.</p> <p>That's what a recession is, and this is shaping up to be just that.</p> <p>For an individual, getting along without debt is a great idea--now more than ever.&nbsp; But for the economy as a whole, a credit crunch is hard on everybody.</p> <h2>What to do</h2> <p>Well, staying out of debt is a good start.&nbsp; Beyond that, it depends on how you make a living.&nbsp; Last year I wrote about <a href="/preparing-for-a-recession">preparing for a recession</a>.&nbsp; That advice still holds, and it's not too late to prepare, even with recession staring us in the face.</p> <p>If you're an employee, you're largely dependent on the success of your employer, and your employer's success will depend on its need for credit.&nbsp; If you have any visibility into that side of your employers operations, you can get a good sense as to how much risk a credit crunch poses. Note that being a great employee won't necessarily help in a situation like this.&nbsp; Many firms that lose access to credit will have to shrink by half or more, so plenty of highly productive employees will have to be let go.</p> <p>As a special case of being an employee, if you work for something other than a business--federal, state or local government, a school or university, a charity, foundation, or similar non-profit--you may be in much better shape.&nbsp; Those sorts of institutions tend not to be dependent on debt to fund their day-to-day operations.&nbsp; They may see their income drop as charitable contributions and tax receipts drop--and they may well have to let employees go--but the aren't in the position of having to shrink their business instantly down to what can be funded on a cash basis.&nbsp; They're probably already there.</p> <p>If you're a business owner, move as quickly as you can to get things on a cash basis.&nbsp; (I realize that this advice is coming rather late in the cycle.)&nbsp; If you've been using credit to bridge the gap between paying your suppliers and getting paid by your customers, this will admittedly require shrinking your business.&nbsp; There may not be time to wind things down gradually--you're probably better off immediately cutting whatever you can't afford without credit.&nbsp; A small business with one or a few employees is better than a medium-sized one with many employees, if the medium-sized one is in receivership.</p> <p>If you're retired, the future is especially murky.&nbsp; The collapse of credit is hugely deflationary, and if that's all that happens, your cash and government bonds will do very well, and you'll come out of this in fine shape (unless you have too much of your retirement money in stocks).&nbsp; The bailout efforts, though, are largely inflationary.&nbsp; To the extent that they succeed, those stock investments may do okay, while the cash and bonds lose purchasing power to inflation.&nbsp; Worst case, we get enough inflation to destroy your dollar-denomonated investments <strong>without</strong> preventing the deflationary recession that wrecks your stocks, and then drives the economy down to the point where you can't get a job either.&nbsp; In that situation you have little choice but to <a href="/opting-out-of-the-money-economy">opt out of the money economy</a> all together.&nbsp; Let's hope it doesn't come to that.</p> <p>No matter where you're starting from, though, recognize that these financial events affect <strong>production</strong>, but they don't affect <strong>productive capacity</strong>:&nbsp; The land is still there, the factories are still there, the equipment and workers are still there.&nbsp; Over time, things will work themselves out to put the productive capacity back into production.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/whats-the-big-deal-about-banks-refusing-to-lend">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/peak-debt">Peak Debt</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-loan-options-for-those-with-good-credit">5 Loan Options for Those With Good Credit</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-us-government-wants-you-in-debt">The U.S. Government Wants You in Debt</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/self-sufficiency-self-reliance-and-freedom">Self-sufficiency, self-reliance, and freedom</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/whats-the-best-way-to-get-out-of-debt">What&#039;s the Best Way to Get out of Debt?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Debt Management banks credit credit crunch credit squeeze Crisis debt Economy financial crisis lending Tue, 30 Sep 2008 21:15:16 +0000 Philip Brewer 2477 at http://www.wisebread.com