Along with banks that are now undergoing increased scrutiny, credit-happy consumers are also finding themselves pushed against the wall as they begin to realize that they need to deal with life without credit. The US economic crisis has forced the credit card industry to rethink its strategy. Since the “revolving credit” concept was introduced in 1958 in the US, the business expanded to become a $1-trillion industry. Between 2005 and 2008, consumer spending using credit has bought the savings rate in the US to nearly zero.

But in May, this trend reversed. The savings rate rose to 6.9 percent, a 15-year high that was boosted in part, by the federal stimulus package. This is just one of the signs that the credit card industry is about to reverse. For the first time in its 40 year history, it is expected that revolving credit will decline.

Credit card companies are tightening credit standards because the default rate has doubled from 2006. Likewise, consumers are hesitant to take on additional debts when their economic future remains uncertain. In many places around the country, the value of real estate properties are still precautious and job security is becoming an increasing concern.

Changing the Consumer’s Spending Behavior

For many, their attitude towards debt has changed. During the housing boom, it seems practical for homeowners to borrow money using their home equity. The new marketplace dynamics changed all that. Even after the US comes out of the recession, spending habits will already be influenced by this dramatic experience.

Over the short term, the consumer’s motivation to save may effectively halt fast recovery because around 70 percent of the US economy relies on consumer spending. Over the long term though, a high savings rate will provide individuals with sufficient capital to invest in new ideas and innovations. It is predicted that this will create jobs and spur economic growth.

In the meantime, there is no escaping the fact that both the credit card companies and the consumers are struggling for balance. Banks are trying to figure out how to establish the credit worthiness of their clients because the FICO score seems less effective in today’s turbulent environment. On the other hand, consumers are adjusting to a “leaner” lifestyle where they need to cut back on almost everything to survive.

As the unemployment rate in the United States continues to rise, top Obama aides are beginning to think that a second economic stimulus package might become necessary. The unemployment rate has risen to dangerous levels and if it is allowed to continue, joblessness might cripple the economy. However, senior officials “do not want to have this fight now” according to Financial Times reports. This is because of the outcry the previous stimulus received from Washington and even the public.

For practical and economic reasons, decisions about a second bailout are likely to be delayed until the later part of 2009 or the early months of 2010. Right now, Obama and his economic teams are trying to steer clear of talks about more actions.

Ever since the $787 billion recovery program was approved in February, two million more jobs were lost. One question that economic advisers are dreading right now is “Did the $787 billion stimulus package work?” Some sectors might say yes but Republicans will certainly give a resounding “no”. The Fox News reported that the $57 billion already released gave jobs to 150,000 workers.

So was the plan worth it at $380,000 investment for every job? There are still arguments over the exact benefits of the recovery plan. Even the Democrats show big divisions in their stance. What is apparent though is that a lot of independent economic analysts believe that the previous stimulus plan was a very bad idea:

Karl Rowe from the Wall Street Journal reports that Obama had promised a “new wave of innovation, activity, and construction”. He further noted that the president claimed that billions will create four million jobs. Well, it seems that the exact opposite happened. He concludes that “Mr. Obama’s words on fiscal matters are untrustworthy”.

On the other hand, the USA Today has observed that the federal assistance worth billions of dollars was unjustly directed towards Obama counties. States that had supported the President during the election received “overwhelmingly” high amounts of money. They have reaped about twice as much aid per capital compared to states that supported McCain.

Meanwhile, House Minority Leader John Boehner from the Politico made a statement that the President and Vice President lied about the economy. He said that they made a complete “fabrication” when they said they didn’t realize how bad the economy was. It was the greatest lie he heard in all the years he’s been in office, according to him.

It was already discussed in our previous two posts, “Fed Tasked to Oversee Systematic Risks in the Financial Industry” and “Arguments over the Fed’s Additional Powers” that there were a lot of oppositions to Obama’s consumer finance regulation plans. However, it seems that it wasn’t the end of the story. Faced with massive opposition already, the proposal to bring all consumer financial-related products under one regulator became further unpopular.

Aside from the frown it received from Congress, the nation’s biggest banks are also lobbying to hinder the Consumer Financial Protection Agency (CFPA) from being created. And if this agency is established, then the financial industry wants its sweeping powers removed. Some of their most notable concerns include the regulator’s ability to force banks and brokers to offer simplified credit cards, mortgages, and exotic products.

Contrary to certain perceptions though, Obama’s proposal does not include setting prices on these financial products. It merely wants the agency to have enough teeth to prevent banks from “mis-selling” their offers. Nevertheless, Chris Stinebert, the president of the American Financial Services Association that the proposal will “yield little in the way of consumer protection and much in the way of increased costs for consumers”.

Democrats and Republicans alike have voiced their reservations about the CFPA as well. Republicans, in particular, have said that the industry does not need more bureaucracy. It was also concerned that the Federal Trade Commission might be stripped off its current authority. Other agencies will be stripped off its powers as well if the CFPA pushes through.

But Obama’s consumer protection plan is not without its supporters. For example, those who see the gaps and overlaps between regulators praise it because the agency has sweeping powers. Consumer protection is just a single aspect of the reforms planned for the financial industry.

Just a few years ago, a “financial planner” has one of the best jobs in the United States. They get a very satisfying work with high compensation. Unfortunately, this isn’t the case today. Post-Madoff and Post-bailouts, a lot of financial advisors are under scrutiny. And they are having the most miserable time of their lives. In order to prove their integrity and justify their rates, they are working harder than ever before. The industry said that changes are being made. The financial planner in the future will operate differently to adjust to the needs of their clients.

Now, the main question for investors these days is: Should you fire your financial advisor? Are they still worth paying for?
The truth is the question is more complex than that. It is not a good idea to dump a good advisor simply because your accounts are valued less compared to two years ago. The steep decline in interest yields in pretty uniform across the board. Instead, there are other methods to determine if your financial advisor is still worth paying for:

Calculate the Numbers – the bottom line is the bottom line. Determine the returns you earned for your money and compare it to what you could have earned if you invested it yourself. The point is, a financial adviser is paid based on what he can do. That means, he should earn more money than what he is being paid for you. In downturns where losses are almost inevitably, he should lose less. It would be a good idea to calculate your earnings in the last three years.

Analyze the Adviser’s Attitude – when the worst of the meltdown was at hand and you were losing tons of money, how accessible was your adviser? Did he admit to the extent of the damage immediately? Were you being assured and given advice for the future? Were the events in the market explained clearly to you? They are paid to do this. If they fail on these tasks, then it is a bad sign they can’t handle pressures.

Know your Priority Status – your priority level varies depending on the type of adviser you select, whether it is simply a broker or an independent fee-only planner. Some brokers might recommend certain investment for their own benefit because of conflict of interest. If you encounter this type of broker, consider switching.

Many investors have established good relationships with their planners through the years. Ultimately, it is up to you to determine if you can afford it and if you want to continue using their services.