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Finance » Aug/Sep 09

Are Better Times Ahead?

Sign, sign, everywhere a sign? Giving us hope that slowly we’re starting to emerge from misery of this brutal global meltdown. Yet sadly, there are still too many economic dragons yet to be slayed, whose fiery breath can stop this fragile recovery dead in its track.

For starters, a greedy energy oil cartel, who got the world addicted to “black gold”, is again predicting skyrocketing energy prices, salivating over the possibilities that oil will hit over US$100 a barrel one more time. Oil prices in the stratosphere may be good for Canada’s oil patch and the traders on Bay Street, where the TSX index is heavily tied to commodity prices - but they’re a killer for consumers and struggling businesses on Main Street who create the majority of jobs in this country and account for two-thirds of economic growth.

Then, there are those greedy banks. You’d think after being flushed with billions of our tax dollars, with big chunks of insured mortgage debt wiped from their books - they’d play fair.

But no. Even though Canada’s Big Five (Royal Bank, TD, Scotiabank, CIBC and Bank of Montreal) raked in combined net profits of almost $3 billion in the first quarter, they’re still squeezing cash-strapped Canadians, hiking rates of interest and pulling in lines of credit.

“I was shocked when my bank decided to close my accounts”, complained one small business owner in an email to my website, lindaleatherdale.com. This entrepreneur had a business account with his bank for five years, plus two Visa cards, one for personal, the other for business. Not only was he informed his business account would be closed, but was told to pay off balances in full owed on his credit cards by June 1, or they’d be yanked, too.

Like many struggling business owners in these tough times, his business account had become overdrawn on occasion, but he swears overdrafts were covered immediately. Angry and desperate, he had his lawyer fire off a letter to his bank branch manager and to the bank’s Ombudsman - but to no avail.

It’s this type of abuse that has sparked howls of criticism on both sides of the border, with angry taxpayers seeing red over sweet bailouts with their tax dollars for big financial players, while they suffer the big squeeze.

Leaders promised to clamp down, but critics argue their get-tough plans to end the abuse aren’t tough enough. For example, federal Finance Minister Jim Flaherty’s plan did not include interest rate caps - even though the spreads between the Bank of Canada rate and what’s charged in interest on outstanding balances are at new record levels. The Bank of Canada rate plunged to a mere 0.25 per cent, yet rates credit card rates didn’t budge, averaging 18.9 per cent for standard cards. Then, some banks began to hike the rate for clients who missed two consecutive minimum payments.

The numbers speak for themselves. A credit card rate of 26 per cent means a record 25.75 per cent spread, when stacked against the bank rate. At 30 per cent, it’s a spread of 29.75 per cent. Obscene.
Flaherty also did little about the practice to hike rates charged on lines of credit, tied to the prime lending rate. Instead of clamping down, he is simply forcing the banks to disclose any rate hike intentions on statements, where they also must display a summary box clearly stating rates and grace periods.

Flaherty did, however, finally clamp down on grace periods, mandating a minimum 21-day interest-free grace period on all new transactions when consumers pay their balance in full by the due date. Currently, there is no mandatory grace period. “This is a major change that was resisted by financial institutions”, said Flaherty, who estimates it will cost banks tens of millions of dollars a year.
But there was nothing to help retailers with rising interchange fees - fees merchants paid to financial firms that operate customer cards every time a transaction is made. Liberal consumer affairs critic Dan McTeague points out some of these fees have nearly doubled in the past two years, while the Canadian Federation of Independent Business is warning debit fees will also rise if credit card companies are allowed in.
Bottom line is where there’s blood, there are sharks. So now we’re watching a new breed of last-resort lenders crop up to fill the void. First, they feasted on desperate consumers denied credit, offering short-term loans with fees and interest that combined could hit as high as 300 per cent or more. Under Canada’s criminal law, a usury rate is anything 60 per cent or higher.

Now, they’re feasting on small to medium-sized business owners, offering them short-term financing in the little-known merchant cash-advance industry. Basically, this sector offers alternative financing, in exchange for a percentage of the company’s future credit-and-debit-card sales, also known as credit-card receivables factoring. The fees are high, so is the interest, which can typically work out to 70 per cent.
Other dragons yet to be slayed are greedy speculative traders in our capital markets, who manipulate prices making them rich, while firms go belly up and employees and investors lose it all. Think Enron.

As for signs we’re may be coming out of this economic mess, here are some: Even though Canada’s unemployment rate held steady at 8 per cent in April - its highest level in seven years - overall employment grew by a surprising 35,900 jobs, Statistics Canada recently reported.
Yet, labour critics were quick to point out the growth was due to a jump in self-employment by 37,000, as people gave up looking to find a job working for a firm, and instead became self-employed.

“We’re seeing unemployed workers, especially older workers, turning to self-employment in desperation”, commented Ken Georgetti, president of the Canadian Labour Congress. The CLC estimates Canada’s economy actually lost 1,100 jobs in April.

But here’s another sign. While globally hammered real estate sectors are showing signs of life, in the all-important GTA (Greater Toronto Area), there were 4,561 sales in the first half of May - up 3 per cent from May 2008, even though the over-built condo market is undergoing a correction. People with jobs buy homes.

And speaking of jobs, there are some gutsy entrepreneurs out there who are defying these tough economic times and instead investing now to position themselves to smartly cash in when the good times roll again. I call them “Recession Busters”. One is Marty Davis, CEO of Cambria (www.cambriausa.com), that manufactures Canadian-mined quartz into top-of-the-line natural quartz surfaces such as countertops and flooring. This Minnesota-based, family-owned firm is investing millions in the Canadian market, and I’ve just been hired as Vice-President, Marketing and Business Development.

This is will keep me busy, but I still plan on fighting back for the hard-working little guys on Main Street. To me, higher taxes are a coward’s way out of this mess, and the last thing consumers and gutsy entrepreneurs need is more fleecing of our pockets.
Politician who favour higher taxes, watch out. Overall, I still believe David can overtake Goliath. So bring on the dragons. It’s time they were slayed.

Linda Leatherdale is one of Canada’s most trusted financial voices, who can be
reached at lindaleatherdale.com. She is  also VP, Marketing and Business Develop-ment for Cambria (www.cambriausa.com)