Europe may be thousands of miles away, but its debt troubles weigh heavily on US markets. Remember the uproar that ensued when the U.S. lost its coveted AAA- credit rating this August? Well, watch out: credit-rating agency Standard and Poor’s decided last night to put 15 of the 17 European countries that share the euro currency on “negative credit watch” (financial speak for “50-50 chance we’ll downgrade you soon”). But does the credit crisis in Europe mean anything for investors here at home? You bet.

You might have noticed the value of your 401K or mutual fund bouncing up and down more than usual. (In September and October you probably saw it fall hard, only to see it rally in November.) You can thank the troubles in Europe for a large part of this volatility. Even portfolios with few European holdings may see wild swings, since uncertainty in Europe feeds into doubts about much of the world’s economy.

Europe’s Got Issues

It’s no secret Europe has a debt problem. Several of the nations that share the euro currency have rung up tons of debt in the last few years. It’s a simple problem, really: they don’t earn enough money (through taxes) to cover their expenses. Take Italy, for example: Its debt of 1.9 trillion Euros is equal to 120% of all the goods and services it produces in a year! Investors are nervous that the Italians might one day just give up and default on their loans, so they are requiring them to pay more in interest to borrow money. But that just makes things even harder for Italy, since higher interest rates make it harder to pay down the debt — and that makes it even likelier that they’ll default. Ouch.

Standard and Poor’s (S&P for short) is one of three major credit rating agencies who assign a risk level of the bonds issued by a country or company, creating a rating score(AAA is the highest score, representing the lowest risk). The higher the rating, the lower the interest rate paid. It is just like your credit score: You will normally pay less interest on your credit card if you have an 800 vs 600. (Have you updated your credit score on Mint.com yet?)

Yesterday, S&P threatened to lower the credit ratings of 15 out of the 17 members of the eurozone (the other two members, Greece and Cyprus, are already in trouble).  S&P wants the eurozone to come together to solve the structural problems with the common currency. If they don’t, then everyone will suffer. So even countries like Germany and the Netherlands, which have a relatively manageable debt load, could now stand to lose their AAA rating – something that the market hadn’t anticipated.

European Contagion?

Stock and bond markets around the world are more interconnected today than ever before. There is a fear that an S&P downgrade could cause investors to abandon the European debt market, which would not bode well for the continent. If the Europeans fail to solve their problems, the common currency could collapse, throwing Europe into recession — which would have repercussions here at home. For example, companies in the US that do business in Europe could see their orders dry up, forcing them to lay off workers. That could start a chain reaction, eventually pushing our economy into the dumps!

News of the potential downgrade caused stock markets in Asia and Europe to fall this morning. Here at home, stocks opened lower. While the fundamentals of those companies haven’t changed, the market fears that a possible recession could wipe out their future earnings. That means your stocks are probably down today. If you have a mutual fund, chances are it is down today because a lot of mutual funds invest only in stocks. If you invest in electronically traded funds (ETFs) to get some exposure to the hot commodity market, you too are seeing red.

S&P will be watching what happens at a critical meeting of European leaders scheduled for this Friday in Brussels. If S&P is happy with the solutions the Europeans come up with, they will leave the ratings alone. But if the Europeans fail to live up to their expectations, they’ll likely be downgraded. If you want to know where your stocks are headed in coming weeks, you might want to brush up on your French.

Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati

photo: herval

Wall Street’s bull statue stands as a symbol of unbridled capitalism. It also represents the inherent masculinity of the financial services industry.

But then came the 2008 Wall Street crisis, and with it, the collapse of the world economy. Suddenly, the manliness of Wall Street was severely dented. Images of newly unemployed bankers carrying boxes of personal belongings out of office buildings were screened around the world. The men in charge, like Hank Paulson, had lost control and had no clue what steps to take. And when Dick Fuld’s Lehman Brothers had to file for bankruptcy, leading to a worldwide loss of confidence in the market, the limits of mathematical models and the efficient market hypothesis were finally exposed.

The era of confidence was over, and attention shifted to the role of emotions and irrationality in economic behavior — essentially, the psychology behind economics.

The Psychology Behind Economic Behavior

Behavioral economics and behavioral finance are concerned with the psychology of economic and financial behavior.  These disciplines have been around for a while, but the financial crisis suddenly threw them in the limelight, and proponents like George A. Akerlof and Robert J. Shiller easily sold many copies of their book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. The financial industry’s dream of a rational market was shot.

Our Financial Decisions Aren’t Rational

The study of behavioral economics aims to understand how psychological phenomena like emotions and group dynamics influence economic decisions. Studies have found that people often make decisions that are not in their best interest — or at least what economists consider their best interest.

For example, from a rational point of view, it’s best to start saving for retirement early in your career. But many don’t, and research shows that people are often terrible at long-term savings.

Investment decisions appear to be prone to all kinds of cognitive and emotional influences. Conventional economists always argued that irrational behavior couldn’t happen in financial markets. Irrational people may distort the perfect equilibrium of market prices, but savvier people would bring prices back to rational levels. But this equilibrium was hard to sustain after 2008. Behavioral economists, who often claim to have a more worldly and empirical approach than economists, who are occupied with models, refuted the belief that bankers behave rationally, carefully balance their decisions and only focus on maximizing their individual self-interests. Homo economicus clearly fell off his pedestal.

Groupthink, for example, has received part of the blame for the financial crisis. Collective beliefs and delusions, it is argued, arise and persist within groups like teams, firms, bureaucracies – and also in markets. Self-censorship, belief in inherent morality, collective rationalization, and stereotyped views of people outside the group are important symptoms.

Deluded By Success

Moreover, bankers and investors tend to be influenced by success stories. And if they belief in such stories, they become resistant to any evidence to the contrary. Besides, envy-inducing tales of young millionaires (and even the fictional Gordon Gekko in Wall Street) were a driving force for many to seek employment in the financial sector.

Business practices leading up to the financial crisis prove the disastrous consequence of ignoring evidence to the contrary of those practices. Hardly any banker could imagine falling housing prices, and they kept on selling all kinds of products backed by mortgages. Only a few hedge fund managers thought outside the box and saw the irrationality of the belief in ever-rising housing prices, as vividly illustrated in Michael Lewis’ The Big Short: Inside the Doomsday Machine.

Regulators Are Just As Irrational

Not surprisingly, the people who were supposed to supervise the bankers were also prone to groupthink and shared beliefs about the rationality of markets. In a brave move of self-reflection, a recent report from the International Monetary Fund’s (IMF) watchdog indicates that the fund fell victim to groupthink, preventing them — and I would argue, other regulators as well — from correctly identifying mounting risk within the financial markets. It was beyond their imagination that emotions and other psychological characteristics (such as herd behavior) could severely alter the world economy.

Does The Problem Lie With The Male Psyche?

Clearly, bankers and regulators operating in this overconfident environment were not sufficiently aware of their irrationality. But since these traits are so masculine, would we have avoided a crisis if mostly women were at the top? I doubt it. Despite increased awareness about the influence of irrationality and emotions in economic behavior, it would, however, be too soon to rule out risky masculine decision-making in the financial sector. Bankers aren’t suddenly doing deep soul-searching; entrenched habits and cultures are difficult to change. And power games (something behavioral economics tells us little about) between bankers and regulators about too-big-to-fail and bonuses demonstrate that, though Dick Fuld may have left the center stage, masculinity still thrives in the financial sector — be it rational or not.

Behavioral Economics: The End of “Manly” Banking? was provided by AskMen.com.

photo: David Reece

We’re almost at the two year anniversary mark of the stock market crash of 2008.

Dubbed as “the black week,” the week that started on Monday, October 6, saw the Dow Jones Industrial Average close lower in all five trading sessions and lose 18% of it’s value.

But it was a few weeks before that – on September 15 – that the collapse of Lehman Brothers and the Dow’s subsequent 500-point drop (the largest single-day drop since the aftermath of the Sept. 11 terrorist attacks) when the panic surrounding the financial crisis peaked.

Two years later, where do we stand?

The recession, skyrocketing unemployment rate, and general fear around the stability of the U.S. and world’s economy has no doubt changed us. But to what extent? How has our savings, investment, and overall sentiment about our finances changed over the past two years?

Let’s take a look.

Saving Up

As you can see in the graph below, the U.S. personal savings rate has roughly doubled from around 3% in the third quarter of 2008 (right before the market crash), to around 6% in Q2, 2010.

That personal savings rate is six times what it was as recently as 2005, when it hit its lowest level. Today, it is, in fact, the highest that it’s been since the mid 90′s. The savings rate had been in a steady decline since the mid 80′s, when it topped out at about 11%, according to the Bureau of Economic Analysis.

Clearly, Americans are saving more. Whether it is out of fear, because of stricter lending guidelines, or a complete shift in consumption habits, we are putting more of our discretionary take-home income into the bank instead of spending it. Since our economy is largely driven by consumer spending, that hasn’t been the best thing for job creation or the stock market, but there are certainly some positive benefits that come from saving, particularly, less debt.

Investing Habits

Dow Jones Industrial Average (October, 2008 – September, 2010)

It’s no secret that investors have shied away from the stock market, and for good reason. The Dow Jones Industrial Average has been hovering around the 10,000 mark most of this year – a level that it first hit back in 1999. That’s right. If you invested all of your money back in 1999, you’ve seen two market crashes, and it’s quite possible that over that 11-year span you didn’t make a dime. And if you started investing somewhere in the middle of that period, it’s very possible you lost a great deal of money.

There is now a heavy distrust in Wall Street and its regulators. And investing behavior is following suit. Since early 2008, equity mutual funds have seen total cash outflows of about $245 billion, according to data from the Investment Company Institute, a mutual fund industry trade group. More conservative bond mutual funds, on the other hand, have seen total inflows of close to $616 billion.

Could the gen-X’ers and gen-Y’ers who lived through these two crashes at ages when they just started dipping their toes into investing in stocks become the lost generation of investors? Only time will tell if either generation regains its trust of the stock market .

Overall Financial Sentiment

Back in May, I ran a few polls on my personal finance blog, 20somethingfinance.com. I asked a few simple questions, and the responses were intriguing.

One of the questions was, “Are you better or worse off financially than you were two years ago?”

The response was definitive:

A total of 91% felt that they were the same or better off financially than before the start of the financial crisis.

Surprised? When you think about it, you shouldn’t be. Gen-X’ers and Gen-Y’ers (the majority of my blog’s readers) have plenty of time to recover economic losses and don’t hold as much savings in the market as older generations. Our losses were somewhat limited in comparison.

I also asked a follow-up question, “How do you feel overall about your finances?”. The results were definitely not in-line with the answers to the previous question.

Here, more than half of respondents said that they were “worried,” or “struggling.”

There are certainly those out there that are struggling mightily at the moment, as the unemployment situation has not improved much since the start of the crisis. Their troubles should not be dismissed.

But why is there such a discrepancy between the reality of our financial situations and how we feel? Perhaps we’re listening to the media and politicians more than we should be.

Americans are saving more and cutting debt at levels that haven’t been seen in almost two decades. That might result in some short-term pain for the economy and job creation, but an economy that is almost entirely dependent on consumer spending is simply not sustainable.

We are re-prioritizing – and, many argue, for the better. Keep working hard, attack your debt, save for emergencies and the future, and drown out the noise of those who want you to feel like things are worse than they really are.

GE Miller is the author of the personal finance blog, 20somethingfinance.com.

(Mattastic!)

There have always been more people who wish to own homes or automobiles than people who can readily afford them. For the larger part of history, those people would simply make do with what they could afford: a smaller house or a rental, a clunker of a car. But in recent years, as we are now well aware, lenders stepped in with “solutions” to help under-qualified borrowers — whether they had poor credit, insufficient down payment, irregular income, or all of the above — take out loans despite their shortcomings. Today, we call those solutions “creative financing.”

While some creative financing solutions have been helpful, many others have been misunderstood and ultimately caused long-term problems for borrowers, lenders and local economies alike. Here are some recent examples of creative financing gone wrong.

Home Equity Loans

Before the housing bust, we were brainwashed into believing that real estate was the only constantly appreciating (rising in value) asset we could ever own. Hindsight is 20/20, of course, and we now know this is simply not true. (We have even come to remember that, in fact, real estate prices are cyclical, just like stock prices.)

That aside, there is another problem with the argument above: even if a home does appreciate, the only way to capture any of that appreciation in the form of spendable dollars is by selling the property. So lenders invented home equity loans and home equity lines of credit, which allowed homeowners to borrow some or all of their equity.

Home equity loans have been around for decades in the form of “second mortgages,” but never had the mass appeal as they did in the past decade. Their ascent into the mainstream is explained in detail in a New York Times article, which explains how advertisers helped shape homeowners’ perception of home equity loans.

“Marketing executives knew that “second mortgage” had an unappealing ring. So they seized the idea of “home equity,” with its connotations of ownership and fairness. The campaign worked. The amount of home equity loans outstanding grew from $1 billion in 1982 to $100 billion in 1988 — in part because a portion of the loans were tax deductible, as the ads often pointed out.”

During the real estate boom of this decade, home equity loans enabled homeowners to use their homes as ATM machines: they drew from their home equity to consolidate other debts, finance home renovations or pay for boats, cars, college or vacations. Today, borrowing from your home equity is next to impossible. Not only do many homeowners simply not have any equity — but even those who have are faced with tight-fisted lenders and subjected to financing requirements many cannot meet.

Bi-Weekly Mortgage Payments

(Casey Serin)

Paying half of your mortgage payment every two weeks instead of the whole payment once per month adds one extra, thirteenth payment at the end of the year. Do it for years on end, and ultimately you will shorten the life of your mortgage and, as a result, the total interest you end up forking over to your lender. Sensing the opportunity, many middle-man companies stepped forward to “assist” customers in paying their mortgages on a bi-weekly basis — and charged “an enrollment fee of a few hundred dollars, and often a monthly handling fee,” for the privilege, as this MSN Money article points out.

The problem? You could very well work out a bi-weekly payment plan with your lender on your own — without having to pay a dime in extra fees. In addition to that, so many homeowners end up selling their home or refinancing before paying off their 30-year mortgage, that those accelerated payment schedules end up reducing their cash flow for little, if any actual benefit.

With the exception of very few situations (picture someone who is 100% sure they would never again move to a new home, for example), bi-weekly mortgage payments are a creative financing tool that ended up lining third-party companies’ pockets at the expense of homeowners.

Auto Leasing

(Symlinked)

In her book Debt-Proof Living, personal finance expert Mary Hunt explains how vehicle leasing came about:

“In the 1980′s, as new car prices crept higher and higher, new car sales began to slip. People were trading their cars for new ones every seven to eight years, not every three to four years as they had been in the good old days of the auto industry. Another problem: people couldn’t afford the payments on the more expensive new cars.”

How do you get people to buy new cars more often? Leasing.

Using slogans such as “you only pay for the part of the car you use instead of the whole car”, dealers rather easily persuaded people to sign two- or three-year leases with low up-front deposits and monthly payments. While numerous problems arose (such as confusion over actual prices, interest rates and mileage limits), auto leasing became wildly popular and is now promoted by virtually all auto manufacturers.

Leasing may make sense for a narrow segment of the driving population. If you have strong reason to believe that you will only need a car for a two to three years and you don’t want the burden of having to sell it once you no longer need it, and you don’t drive more than 15,000 miles per year, you may be better off leasing than buying. But for most people, purchasing a vehicle — particularly a used one — makes most financial sense.

If you do decide to lease rather than buy your next car, however, be careful: increasingly, manufacturers are extending lease terms, offering leases as long as five years. Locking yourself into a five-year lease pretty much negates the biggest draw of leasing: its short-term committment.

Stuck in a lease that no longer makes sense for you? You could try to transfer it to someone else. Read our article on getting out of a car lease for the details.

Cash Back or 0% APR Deals

(David Hilowitz)

In the beginning of this decade, auto manufacturers faced a string of problems affecting their sales: a recession caused many consumers to rethink the need to purchase new cars, the Sept 11 terrorist attacks scared even more consumers into spending withdrawal and the jobless recovery that followed helped matters no further. So the automobile industry invented a neat marketing trick that they continue to use even today: 0% APR or cash-back offers.

How do these work? A manufacturer would offer buyers the option to choose a 0% loan (if financed through the auto dealership) or a certain amount of cash back. The cash back would typically be applied as down payment for the car. Figuring out which makes better financial sense aside (a number of online calculators, including this one at SmartMoney, can help you with the math), these offers have a number of drawbacks.

To begin with, they are typically reserved for “premium credit” buyers. In other words, you’d need a high credit score to qualify — and many people who hope to take advantage of those offers don’t. Many buyers also don’t realize that these incentives are offered by the manufacturer — not the car dealer. So even if you qualify for a 0% loan or $750 cash back, you should continue to negotiate with the dealer: there will still be room to push that sticker price lower. Finally, those offers tend to be available only on the car models that the auto makers are trying to push the hardest. As gas prices hit record highs in the summer of 2008, for example, you could see generous 0% APR or $5,000 cash back offers for many SUVs. Whether a gas-guzzler was a good fit for your automobile needs or weekly gas budget was another question.

(SliceOfNYC)

The banking industry, long accused of consumer abuse, now finds itself in the cross-hairs of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Signed into law by President Obama on July 21, the Act takes aim at a number of long-standing bank practices that many deem harmful to consumers.

The biggest change sanctioned by the reform is the new Consumer Financial Protection Bureau, an open-ended regulatory agency which, the Wall Street Journal says, will have “rule-making and some enforcement power” over banks and credit unions. Mortgage lending, specifically, figures to be an area of interest for the new agency.

Here are some ways that banks have historically preyed on their customers – and which the Consumer Financial Protection Bureau is likely to confront:

Subprime Lending

Many allege that subprime lending, in and of itself, constitutes an abuse of consumers by banks. Suprime loans are made to borrowers who are deemed a higher credit risk (i.e. they have low credit scores). These loans are considerably more expensive than “prime” loans made to borrowers with high credit scores, whether it’s because of higher interest rates, more fees, or both. During the housing boom, subprime lending flourished, with many borrowers receiving loans with low teaser rates that quickly ballooned to double digits, along with terms, like interest-only payments, that pretty much made it impossible for the borrower to make a dent in that debt.

In his book The Housing Boom And Bust, economist Thomas Sowell found that subprime loans rose from 7% of all mortgage loans to 19% from 2001-2006. Other “non-traditional” loans rose from less than 3% of all mortgage loans to nearly 14% during the same period.

Lending Without Income or Credit Verification

(CarbonNYC)

Another criticized bank tactic of the last decade involves making loans (both subprime and prime) without doing the appropriate income and/or credit checks. These loans are commonly known as no-doc loans or, in industry jargon, “liar loans.”  That nickname speaks for itself: many consumers deliberately lied on their loan applications (or were told to lie by their mortgage broker), misrepresenting their job status or income in order to seem like suitable borrowers. In other instances, lenders knew full well that unsophisticated borrowers were unlikely to repay loans and simply made them anyway in order to collect commissions.

The new law requires that banks and credit unions verify that borrowers are truly capable of repaying any mortgage loans they agree to sign.

Higher Prices Due to Debit Card Fees

(DeclanTM)

A May 28 New York Times editorial focused on the fees that retailers are required to pay Visa and MasterCard on debit transactions. So-called interchange fees, which are sometimes as high as 3% of a purchase, are set by card companies. Nearly 80% of the fees end up in the hands of banks, which “induced the banks to issue more cards.” In 2009, businesses paid an estimated $20 billion in debit transactions to Visa and MasterCard. Many argue that merchants – particularly small businesses – pass along those additional costs to consumers in the form of higher prices.

An earlier version of the financial reform bill included price controls on how high these fees could rise. The amendment would have required the Federal Reserve to set fees at “reasonable and proportional” levels, with the intent of saving small businesses “billions of dollars a year” and, hopefully, reducing prices paid by consumers. The amendment, however, didn’t make it into the final version of the bill.

Hiking Other Fees to Offset Regulation

(betsssssy)

Banks have already begun responding to tighter regulations (which limit their profits and ultimately increase their costs of doing business) by introducing new fees or increasing existing ones. On June 27, Reuters quoted Senator Charles Schumer saying there was a “trend across the banking industry” involving the elimination of free checking accounts. Now that banks can no longer enforce overdraft fees by default, other streams of revenue are being sought.

According to a statement issued by Schumer, “this is a radical departure from what customers are used to and it is coming too fast for them to even realize what hit them.” Schumer also wrote a letter to Federal Reserve Chairman Ben Bernanke in which he requested that the Fed pay “special attention” to banks during this transitional period, and ensure that customers have “ample time” to prepare for new fees.

Difficulty Switching Banks

(Omar Omar)

It has also become increasingly difficult for consumers to switch banks once they become dissatisfied with their current one. In a Red Tape report, MSNBC discussed “the pain and suffering consumers must face when trying to leave one bank to join another.” Citing a Federal Reserve study on switching costs, MSNBC reported Fed senior economist Timothy Hannan’s conclusion that it was “incredibly difficult” for consumers to get the facts about the costs of switching. 

The Fed also found that banks employed a “bargains-then-rip-off” strategy, offering teaser rates and other enticements early on before uncorking overdraft fees and other penalties once they lock a customer into an account.

What is more, once a customer is “locked in,” it is becoming increasingly difficult to get out. Because of features like direct deposit, automated online bill payments and automatic savings plan deductions, dumping your bank has become so much of a hassle, that many consumers end up putting up with fees even though they could avoid them if they opened an account elsewhere.

Three Republican Senators joined 57 Democrats Thursday to get the necessary votes to pass the financial reform bill, soon to be known as the Dodd-Frank Act (in honor of its two originating supporters). It is now headed to President Obama for his signature.

The law is primarily focused on avoiding future systemic banking system failure, the kind of which has pushed us into the largest recession since the Great Depression. Here’s a quick overview of some of the measures put in place to help achieve that goal.

* Volcker Rule will force big banks to sell hedge funds

*New transparency, reporting and capital rules for derivatives

* Liquidation mechanism for big failing banks to minimize market impact

* Combine two bank regulators at the center of the crisis

* Create a council of regulators to watch for systemic risk

* Give shareholders more power in corporate governance and CEO pay

* Audit of the Fed’s emergency and other lending facilities

Those may sound all fine and dandy, but probably come across as being relatively meaningless to the average consumer. That’s where the new Consumer Financial Protection Bureau, housed in the Federal Reserve, comes in. It is solely devoted to combating consumer abuses in the marketplace.

Here are four of the big changes that you can expect — and their consequences, both intended and unintended.

Credit Scores

The upside: Long before this regulation was passed, you could get three free credit reports from annualcreditreport.com, under federal law. That was not the case with credit scores. You almost always have had to pay for those or sign up for something (credit monitoring) that you probably shouldn’t.

Now, however, if a lender turns down your application for credit because of your credit score, the lender is required to tell you what your credit score is, for free.

The downside: Credit scores, like credit reports, should be free to consumers at least a few times per year. Oh well, maybe next time.

Mortgage Risk

The upside: A former employee of the defunct mortgage company Countrywide Financial, which was gulped up by Bank of America (BAC), once told me “Yeah, we approved everything, often times without even looking at credit history or income. We were making good money, so why not?”

Under the new rules, lenders must verify a borrower’s credit history, income, and employment status, so that we don’t get into the foreclosure mess that companies like Countrywide put us in.

Banks will also be required to hold on to at least 5% of the loans they make instead of selling them to investors. More risk should equate to more precaution if you can’t unload the cancerous loans.

The downside: With tighter requirements, banks are scaling back their risks, which might make it harder for you to get a mortgage. My opinion? If it’s hard for you to get a mortgage, you probably shouldn’t be buying a house.

Credit and debit cards

The upside: Credit card minimums imposed by retailers now cannot exceed $10. Only the Federal Reserve can raise that limit, which theoretically will protect consumers from spending more at the local store or coffee shop just to hit the minimum requirement. (Read more about this here.)

Also, the Fed will have the power to limit interchange fees on debit-card transactions. (Interchange fees are the fees that card issuers, Visa (V) and MasterCard (MA) collect from merchants as a percentage of each transaction.) However, the rule applies only to banks, not to Visa and MasterCard. Banks usually charge stores 1% to 2% for each transation, but retailers say that lower fees could allow them to cut prices and bring on more workers.

The downside: Retailers now legally have the right to require a minimum charge of $10, if they so choose, in order for you to be able to use a credit card. This may be prohibitive if you just want to buy a candy bar, for instance. (On the flip side, the question is whether you really need to be using a credit card to buy a single candy bar, rather than paying the $1 or $2 cash.) Prior to this law, merchants were actually breaking violating their contracts with Visa and MasterCard, which required to accept all transactions regardless of their amount.

Also, an elimination of yet additional bank revenue streams (this time in the form of interchange fees) might lead to introducing fees in other areas – higher interest rates, lower rewards, or the disappearance of ‘free checking’ accounts.

Financial Adviser Disclosures

The upside: Financial advisers must now disclose all fees, any disciplinary actions and potential conflicts of interest, such as commissions. Brokers who sell stocks, bonds, annuities, and other investments have not always been required to make such disclosures, permitting them to act in their or their company’s best interests, and not yours.

The downside: This isn’t a done deal. The SEC has commissioned a six-month study to determine whether average investors are sufficiently protected by the rules already in place or whether something stronger is necessary.

For more details on what the bill aims to accomplish, read Senate Banking Committee Chairman Senator Dodd’s 16-page summary here. Appreciate it: the full bill is rumored to fill 2,232 pages.

GE Miller discusses personal finance topics for young professionals at 20somethingfinance.com.

(zigazou76)

Many economists say the recovery will be slow, but, overall, they agree that the worst of “the Great Recession” is now over.

And this is the time for smart consumers to reassess their portfolios.

Generally speaking, how long it will take you to bring your investments back to where they were pre-economic crash and how you should go about doing it depends on your age. It also depends on the kind of financial shape you were in before the recession and currently. Luckily, almost anyone can take straightforward and realistic steps to generate more wealth in the post-recession world.

If you want to get back ahead of the curve financially, consider the following tips.

Evaluate The Current State of Your Portfolio

Now is the perfect time to evaluate the overall makeup and performance of your investments. Chances are, the investments you held before the fall of 2008 (assuming you still hold them) are in a totally different place midway through 2010. If you are an active investor and picked your own stocks, some of them may have taken serious hits. At this point, it is your call whether to hope they will someday rebound or cut your losses.

If any of your investments have produced gains, cashing in now could provide some capital for better investments or other purposes discussed below. In any case, the first step of rebuilding your wealth post-recession is to conduct a thorough analysis of where your investment portfolio is today.

Re-balance Your Portfolio

(Casey Serin)

Whether you are an active or passive investor, the recession probably took your portfolio out of alignment with your chosen asset allocation. The way to correct this problem is by re-balancing.

The simple act of stocks performing better than bonds (for example) will increase how much of your portfolio consists of the better performers. While this might sound desirable, it actually isn’t.

As Vanguard founder John Bogle told the Wall Street Journal, asset allocation is critical to long-term investment performance. Once you’ve established an asset allocation that works best for you based on your investment horizon and risk tolerance, the fact that one category is temporarily doing better than the others is no reason to let that category dominate from now on.

There are two ways to deal with re-balancing. The first is to just do it once or twice a year. That can be time-consuming and few investors would find particularly enjoyable.

The other way is to automate: invest in life-cycle funds (also known as target date funds) which invest on an asset allocation based on your age and are automatically rebalanced for you.

Grow Your Portfolio

(Horia Varlan)

With winners kept or cashed in, losers weeded out and the portfolio rebalanced, it is time to grow your investment returns. If you are young and will not need your investment returns for many years to come, you can place bets in the market with little worry of temporary drops. Assuming you have some extra capital at your disposal, now is the time to beef up your current investments (or select new ones in line with your asset allocation) and give them a chance to grow.

Ways to obtain more investment capital include:

* Reducing expenses

* Reallocating capital from current poor performers into better investments

* Repaying debt and then using that same money to invest (more on that below.)

Aggressively Repay Outstanding Debts

(SqueakyMarmot)

If you have a lot of debt, consider repaying some or all of it before pursuing stock market opportunities. Getting back (or closer) to free and clear will put you in an infinitely better position both now and whenever the next financial meltdown strikes. It also enables you to later invest with full focus and zero regret about what you “should” be doing with the money instead.

To get started, rank your debts from highest amount owed to lowest amount owed, and also in order of priority. (Credit card debt, for example, would outweigh a student loan, which likely has lower interest that is also tax-deductible.)

Then, work out a payment schedule that includes paying more than the required minimum and a firm date for full repayment.

Mint.com’s new Goals feature can help you work out a plan for repaying your debts and track your progress along the way.

Ask for a Raise at Work

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Now that employers are beginning to feel more optimistic about their future, it may be the perfect time for you to ask for a raise. The key is to frame your request in terms of benefits to the company rather than your own desire for more money. In the days and weeks leading up to your proposal, spend some time putting together evidence of how your work has helped the company’s bottom line.

If a project you ran led to a measurable increase in sales, prove it. If you somehow lowered costs, prove it. Then, demonstrate to the boss how you are adding value and could take on even more responsibility at the company.

To add credibility to the proposal, search for data on the types of salaries that comparable employees are earning, either in your firm or elsewhere. This would help your request look more like a business proposal and less like a shameless plea for higher pay.

(Katrina.Tuliao)

A sharp stock market downturn — or wild swings like the ones we’ve been experiencing in recent months — often serve a signal to re-evaluate our investment strategies.

If anything, a sharp drop in your equity investments may automatically take your asset allocation off kilter, disproportionately increasing the section of your overall portfolio represented by other investments, such as bonds or cash, that may have not lost value.

A market downturn is also, contrary to many investors’ knee-jerk reactions, a good opportunity to take advantage of lower stock prices, especially if you’ve got a long investment horizon ahead of you. 

Today, Mint explores some options for where to put your money in a bad market (with an eye toward inexpensive investments.)

Avoid Knee-Jerk Reactions

While a market downturn is typically a good wake-up call to reevaluate your investments, that doesn’t mean you have to make radical changes to your portfolio.

Investing guru and Vanguard founder John Bogle, for instance, maintains that asset allocation is the key ingredient to investment performance. (Bogle offers a brief introduction to asset allocation in a January 2009 Wall Street Journal interview.) If your portfolio is already constructed in alignment with the appropriate asset allocation for your age and risk tolerance, there is no need to panic and change that arrangement now.

Countless other experts (including I Will Teach You To Be Rich author Ramit Sethi) remind us that emotionally-charged reactions to bad markets tend to be mistaken. Rather, we are best served by defining a long-term investment strategy that is built to weather both up and down markets.

Consider Your Time Horizon

(Aaron Geller)

Another important factor to keep in mind is your time horizon. If you are younger than 30, a bad market is an ideal time to swoop in on underpriced “bargain” investments (more on that below.) Because you theoretically will not withdraw from your portfolio for many years, you can afford to tie up some money in stocks that seem sure to rebound later on.

That is less true of people with shorter time horizons, such as those who are just five or ten years away from retirement. If you’re in that group, you will be better off focus less on bargain hunting and more on diverting your investment capital to the “safe harbors” of bonds or high-yield savings.

“Bargain” Stocks

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When the market tanks, bargains abound for those who know how to take advantage. Unfortunately, many investors get so caught up in generalized fears about “the economy” that they neglect the lucrative investment opportunities waiting to be capitalized upon. As an antidote to such thinking, Warren Buffett told the New York Times in October 2008:

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

Following the fall 2008 crash, Harvard MBA John T. Reed noted that many large companies were valued by the stock market for less than the amount of cash in their own bank accounts. Charles Schwab, for example, was valued in October 2008 at just $21 billion based on its stock price, despite having $27.8 billion in cash in the bank.

These opportunities, Buffett, Reed and others contend, represent inexpensive and highly lucrative opportunities for ordinary investors to profit from the irrational despair that permeates bad markets. To spot them, keep an eye out for companies with strong fundamentals which other, more fearful investors seem to be irrationally staying away from.

Bonds

(M. Kelley)

Bonds are another relatively inexpensive option for intelligent bad market investing. One of the fundamental features of bonds is that they typically trend in the opposite direction of stocks. This is why a portfolio diversified across both equities and bonds (or fixed-income investments) will generally perform better during a stock market downturn than one that’s heavy on equities.

If equities are performing poorly, there is a high likelihood that bonds (whether corporate or treasury) can offer at least modestly higher returns. Municipal (local government) bonds also offer the perk of not having to pay tax on your interest earnings. As a trade-off, the returns on municipal bonds tend to be more modest than other, fully taxable investments. In a bad market, though, many are willing to accept lower returns in place of losses elsewhere.

High-Yield Savings Accounts

(JMRosenfeld)

A smart bad market option for the ultra-conservative (or those with short time horizons) is a high-yield savings account. Be advised, though, that even the interest you could earn these days with a high-yield savings account is not nearly as high as the return on investment you could get over the long run from equities.

Still, these days you could find high-yield accounts with yields as high as 2% or 2.5%: much better than the paultry 0.5% yields offered by traditional savings accounts. The benefit, again, is that this option is at the very least extremely safe compared with buying stocks, since all bank deposits have FDIC insurance up to $250,000 per individual. That means that even if a bank went belly up, the government is guaranteeing that your money is intact.

Any changes in investment strategy pertaining to bad markets should take into account your own circumstances. Those with lengthy time horizons are perfect candidates to roll the dice on some of the inexpensive bargain stocks that feeble-minded investors tend to avoid. Those with shorter time horizons or more conservative approaches to investing are better suited to consider bonds or high-yield savings accounts.

Earlier this week, Mint.com analyzed the basics of Europe’s sovereign debt crisis. The growing concern about Europe’s financial stability stems from the overindulgent borrowing of a handful of eurozone nations. Greece, Portugal, Spain and Ireland are among the main offenders. The world bond markets, skeptical that those countries can repay investors, have heavily downgraded the creditworthiness of their bonds. Today, we’ll take a deeper look at the unique problems encountered by each of these nations.

Greece

Greece’s debt woes are at the heart of the entire crisis. In a straightforward Q&A, CNN explained that 2008′s global financial meltdown “whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits” far in excess of the European Union’s stated limits. In fact, so out of control is Greece’s borrowing problem that its debts (roughly $413.6 billion) actually outweigh its Gross Domestic Product, or GDP. When reporters and journalists talk about Greece’s 12.7% deficit, they mean that Greece spends 12.7% more than what it collects in taxes.

According to this Reuters timeline, in November 2009 Greece’s government projected that in the country’s national debt would balloon to a record 124.9% of GDP in 2010 - by far the highest ratio of any eurozone country. On December 7, 2009, S&P put Greece’s “A-” bond rating on negative watch, and on December 8, Fitch Ratings slashed their own rating to BBB+ with a negative outlook – the first time in a decade that any rating agency assigned Greece a rating lower than A. Standard & Poor’s quickly followed suit by lowering its rating of Greek debt to BBB+ on December 16. Various stopgap measures were proposed, including tax hikes on tobacco and fuel, VAT increases and abolishing bonuses at state-run banks. Unfortunately, none of these were enough to ward off the inevitable. On April 27, S&P downgraded Greek bonds to BB+, or “junk” status. As of May 4, the UK’s Guardian revealed that investors “doubt whether the €110bn bailout will actually solve Greece problems.”

Portugal

Greece’s struggles have sent ripples through other seemingly unrelated countries. Bringing the hammer down on Greece’s debt inspired ratings agencies like Fitch and S&P to examine more closely the finances of Portugal. As CommodityOnline.com explained in late April, Portuguese bonds were downgraded two notches once Greek debt became junk. In truth, Portugal’s finances have faced growing scrutiny throughout 2010 for largely the same reasons: concerns over its ability to repay existing debts and sustain spending at current debt-fueled levels. More than a few analysts and world leaders “worried that [Portugal] might be the next week link in the Eurozone after Greece.”

Portugal’s recent financial reports aren’t pretty: a 2009 budget deficit of 9.4% of GDP and outstanding debts totaling 85% of GDP. In February 2010, the UK’s Telegraph reported that credit-default swaps measuring the risk of Portugal defaulting on its bond debts “surged 28 basis points on Thursday [February 4] to a record 222″ amidst reports that prime minister Jose Socrates was about to step down. Parliament minister Jorge Lacao, remarking on the inability of Socrates to pass needed austerity measures, said that “what is at stake is the credibility of the Portuguese state.” While various studies have concluded Portugal and Greece need to immediately cut spending by 10% or more, the mere idea of doing so has triggered mob violence.

Spain

Spain is another country whose financial future is intertwined with those of Greece and Portugal. The Spanish economy has been nothing short of abysmal since the global financial meltdown took hold. CNN noted in late April that unemployment had reached 20% (second only to Latvia for highest unemployment of any eurozone country.) Worst yet, the entire economy shrank by 0.1% in the fourth quarter of 2009. It was the seven consecutive quarter of negative GDP for Spain.

On April 28, Standard & Poor’s reduced Spain’s long-term bond rating to “AA” from “AA+ because of “risks to budgetary position.” When pressed for an explanation of the downgrade, S&P credit analyst Marko Mrsnik stated that “the Spanish economy’s shift from a credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed.” Moody’s economist Andreas Carbacho-Burgos told CNN that Spain “has been in the doldrums” for several years and they were “not sharing in the output recovery that was happening in Germany, France and Britain.” The Telegraph quoted Nobel economist Paul Krugman saying that Spain, not Greece, was the real “trouble spot.”

Ireland

Ireland’s struggles, too, are contributing to fears of a contagion in Europe. To its credit, Ireland has been far quicker than the others to take hard, but necessary corrective action. While foreign leaders allowed themselves to be paralyzed by public protests, Ireland was among the first nations to cut government spending and raise taxes. Sadly, it appears that might be too little, too late. The New York Times reported on May 20 that Ireland will run one of the world’s highest budget deficits (11.7% of GDP) during 2010. A lack of new economic growth is inhibiting the positive effects of the spending cuts and tax hikes. Excluding the profits of foreign residents (which are taxed lightly in Ireland), 2009′s deficit looks more like 17.9% of GNP, and could be as high as 14.6% for 2010.

The rest of the world has an enormous stake in whether of not these countries resolve their problems. In the third and final installment of this series, we’ll look at potential consequences to other countries (including the United States.)

Read the first installment in our European Spotlight series here.

As Euro-zone finance ministers finalized the details on the 440 billion Euro ($527 billion ) bailout package for troubled EU economies on June 8, financial markets in the US faltered. Stocks fell to their lowest level in seven months as fears persisted that Europe’s sovereign debt crisis will thwart the global recovery.

Much like the meltdown of 2008, the underlying causes of this crisis are not immediately obvious. Many observers find it hard to imagine how entire governments can “go bankrupt,” yet Greece appears to be on the verge of that situation exactly. It is even less obvious how the downfall of one country’s bonds can affect the rest of the world. But put into context, the causes of Europe’s growing financial problems are not especially complex or difficult to understand.

Today, as US investors watch the direct effects of Europe’s financial mess shrink the size of their portfolios, we begin a three-part investigation into what caused it, the specific countries affected, and potential consequences for the rest of the world.

Debt Spending

At the root of Europe’s financial woes is the manner in which its governments are financed. Simply put, Greece (and most modern governments) rely heavily on debt to fund their operations. Everything – from the military to administrative offices to social welfare programs — costs substantial sums of money to run.

Few (if any) of today’s governments collect enough revenue from income, business and sales taxes to fund all of these obligations. Instead of scaling back government spending to the amount collected from taxes, Europe’s governments borrow the balance. Primarily, this borrowing occurs via the sale of national government bonds.

The basic idea behind bonds of struggling countries like Greece and Portugal is identical to that of savings bonds in America. The government in question sells bonds of various denominations, promising to pay a set rate of interest at a stated maturity date. Generally speaking, financing a government in this manner is quite standard. Investors view government bonds as stable and secure, because it is widely believed that no government would default on its outstanding debts.

Junk Bonds

Investors will happily buy up a government’s bonds – to a point. The problem arises when governments borrow more than they could ever hope to repay. This appears to have been the case in Greece.

Back in November 2009, the UK’s Guardian reported that Greece’s public sector debt (the highest of any country in the European Union) had ballooned to 12.5% of GDP. Worse yet, Greek public debt was projected to rise over 135% by 2011. Despite these ominous signs, bond rating agencies neglected to downgrade Greece’s bonds – temporarily. The fact that Greece was one of the Eurozone’s fastest growing economies from 2000-2007 made the skyrocketing structural debt easy to ignore.

On April 27, though, Greek bonds were downgraded to “junk” status. Junk status is, in layman’s terms, the worst thing that can happen to a bond. To rate bonds as junk is the rating agency’s way of communicating to investors that the bond issuer (Greece, in this case) is financially unstable and cannot be relied upon to repay its debts.

Once this happens, all but a few bargain-hunting investors completely avoid buying them. Naturally, this creates immediate and catastrophic economic problems for the bond issuer. For one thing, it is no longer possible to continue spending at the debt-supported levels of old. Because the country’s bonds are perceived as junk, there are no buyers and the country is thereby deprived of a way to spend more than it has.

Beyond Greece

Regrettably, the consequences of Greece’s profligate debt spending spread far beyond Greece. Stock markets around the world took an immediate dive once Greek bonds were downgraded. London’s FTSE 100 (an index of England’s 100 most capitalized firms) fell over 150 points. There were corresponding falls in New York, Frankfurt, New York and Athens.

Fears of Greece defaulting immediately prompted suspicion about similar problems brewing to the west, in countries like Portugal, Spain and Ireland. Bloomberg quoted Harvard professor Kenneth Rogoff as saying these three countries were “conspicuously vulnerable” to default as a result of their own high debt ratios. Ireland, whose debts comprise 14.3% of GDP, actually had the euro region’s largest deficit in 2009. Meanwhile, Spain’s public debt consumed 11.2% of GDP, while Portugal’s swallowed 9.4%. The UK, too, boasts an unattractive debt ratio of 12.6%.

The European Union, to put things in perspective, mandates that member countries not allow their debts to surpass 3% of GDP.

The larger fear is that these are not merely the isolated problems of various countries, but the early workings of a full-blown contagion that will decimate Europe’s banking system.

The Details

The most ominous forecasts of what Europe’s financial crisis could lead to center around a handful of over-indebted countries.  Mint.com will probe deeper into the financial problems of Greece, Ireland, Portugal and Spain in the next installment of this series. Broadly speaking, the crisis can be understood as the world market’s reaction to years of overindulgent borrowing on the part of these countries.

To learn more about investing in government bonds in this environment, read our story With Greece’s Troubles in Mind, Should You Invest in Foreign Bonds? To read more about junk bonds, see our story Moody Markets: What Happens When a Nation’s Debt is Graded as Junk?