I did CBC radio yesterday because everybody was talking about the “good news.” The central banks around the world are cutting interest rates. But all the hand clapping and “yipees” may be pre-mature. I’m not sure that Matt Gallloway, or the listeners, wanted to hear my very pessimistic take on the mess we’re in. But it’s a MESS we’re in. That anyone would think a .5% cut in the Bank of Canada’s rate would fix it is another example of how we don’t understand money and how it works.

One of the biggest mistakes people make when it comes to credit is that they simply don’t know the rules. It’s kind of like the way some people feel about their cars; as long as it runs, they don’t care how it works. Hey, I’m one of those people when it comes to cars, but I’ve at least been sensible enough to find out what the rules are to keep the sucker running, and follow them. Not so with most people and their credit. They don’t know the rules and one of the rules that’s about to bite a lot of people in the butt is this:

Credit card debt and unsecured lines of credit are “callable debt.” Yup. That means that at any time the lender can say, “Give me my money,” and borrowers have to cough it up.

No way, Gail. That can’t be true. Every time I tell people that credit card debt is callable and the lenders can ask for their money back at any time, this is their response.

Heads up folks, it’s a fact and American’s are learning just how it works.

Of the 20% of American Express clients who saw their limits reviewed as a part of normal operating procedure, FIFTY PERCENT saw their limits go DOWN. That means that to maintain a healthy credit ratio (remember, no more than 60% of you limit should be used) a lot of people are going to have to find the money somewhere, or reconcile themselves to watching their scores plunge. Someone with a $2,500 balance on a card with a $5,000 limit is using 50% of their credit line. But if that limit drops to $2,500, they’re now using 100% of their available credit, which is the biggest of no-nos.

In the U.S., a recent Consumer Action survey found that 75% of the banks questioned said they lower credit limits as a way to manage risk to protect consumers. Yah! Sure! Where was all that “protecting consumers” when they were throwing credit at people and upping limits at a wicked clip. Nope, they’re not protecting us. They’re lowering limits because money is drying up and they are scared. We should be wary too.

• Lower credit scores mean the cost of borrowing goes up.
• Lower credit limits means that consumers can’t just turn to their credit when they want to.

While many experts are suggesting you shop around for more attractive credit, I’m not sure how successful you’ll be in this lending climate. If your own lender wants to nail your shoes to the floor, why would some lender that doesn’t know you from Jack want to give you a better offer when the stakes are so high? Nope. Here’s what you should do:

Significantly lower the balance owned on your credit card. Hey, I’ve always been of the opinion that your balance should be zero after every monthly payment, but if you’re carrying a balance anywhere above or close to the 60% line, get to work paying that sucker off. The higher your balance, the more likely you are to fall under the lender’s microscope and find yourself with a lower limit.

Keep your eyes on the mail. If you’re like me and routinely dump what you think are dumb marketing letters, stop. Start opening and reading everything to make sure you know if this happens to you. Go over your monthly statement, including the credit limit box, and watch for interest rate spikes and new penalties.

Check your credit report. If you haven’t looked at your credit report in the last six months, now’s the time to do it. Be assured that your lender(s) will be. Even a small slip could have lenders looking closely at your potential risk of default and covering their asses with a lower limit, a higher interest rate, or both.

While I don’t believe we should be panicking — who makes a good decision when they’re panicking — I do believe we have to get our heads out of the clouds and start taking this mess seriously. I doubt you’ll hear a lot from me in the media because my message is simple and clear: get your debt paid off any way you can; this is no time to be spending money on crap! Not exactly the message the banks, the retailers, the advertisers want to hear, right?

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“Cheer up, things could be worse. So I cheered up and sure enough, things got worse.”

This could be the mantra for the financial markets these days.

A week ago, the U.S. government seized control of mortgage finance companies Freddie Mac and Fannie Mae, two government-sponsored mortgage giants.

Then, on the weekend, 58-year-old investment bank Lehman Brothers undertook the largest bankruptcy filing in history.

Last Monday, markets around the world dived into the toilet, losing anywhere from 4% to 7% depending on the market sector.

Merrill Lynch heaved a huge sigh of relief when it was Shot-gun Wed to Bank of America.

The crisis that has put Merrill, Lehman and Bear Stearns (which was the first major house to hit the rocks back in April) in jeopardy is being likened to The Great Depression. The big fear is that continued slip-sliding by the U.S. financial giants could create a domino effect, sending world markets into a tailspin. Based on what’s been happening so far, there’s no doubt continued failures in the U.S. will not stop at it’s borders. Rich Yamarone, head of economic research at Argus Research in New York has gone so far as to say we should expect “carnage.” Ouch!

The entire time these companies were making bad decisions, which ultimately brought their downfall, they were quipping egotistically that “the fundamentals have changed.” It was their excuse to dick with their regulations, side-step the reporting mechanisms they had, and generally act like horses’ asses.

If I had a dollar for every time heard the phrase “The fundamentals have changed” I’d be a wealthy woman. Here’s a Call from the Voice of Reason: Fundamentals don’t change; that’s why they are called “fundamentals.” However, from time to time, because people want to change the rules to suit their objectives, they claim that the fundamentals of changed, the fiddle with the regulations and then we have what we have now: A MESS.

While we’ve see the crisis hit in the credit world, and then spread to the investment world, them’s not all the Financial Columns that are shaky.

Over on the Insurance Pillar, AIG Insurance watched it’s stock value plunge, bringing threats of a potential downgrade in its credit rating, making it more expensive to borrow money. On the brink, AIG was bailed out last night by the U.S. government to the tune of $85 BILLION! That’s a desperate move to stop the spread of disaster that could potentially begin a domino effect with the insurance world.

So, three of the four “pillars” are crumbling. And regulators are threatening to tighten controls. Hey, where were these guys when the companies were playing loose and fast with the rules? Asleep? Making money? Hmmm.

Everything in life runs in cycles. Get yourself a pencil and a piece of paper and draw a circle. On the left side of the circle, draw an arrow that points up to the top of the circle. That’s the Climb Side. On the right side of the circle, draw an arrow that points down to the bottom of the circle. That’s the Slip Side.

Sadly, we humans are so short-sighted that when we’re on the Climb Side of the Circle – when we’re moving up to the top of the cycle – we can’t imagine that there’s another side; the downside always comes as a HUGE shock. You only have to look at how dumb we got about house purchases to see how dumb we can really be. Sub-prime mortgages? 40-year amortizations? Zero down? Really?

Prices go up, prices come down. Inflation goes up, inflation comes down. The market goes up, the market comes down. Picking up the pattern?

We’re in a big “come down” period right now (except for inflation which is rising). And all you homeowners better hold on to your hats; this rollercoaster has rounded the peak.

Canada’s real estate market, which looked like it was holding steady in spite of the U.S. meltdown, lost 5% of it’s value from last year’s figures. So a home that was worth $365,000 last year is now worth $18,000 less.

So what does all this news, this investment-world goobledegook, mean for you and me? Well…

You better know what you’ve been investing in, and be committed to a buy-and hold strategy, because that’s what you’re going to be looking at for a while. This is NOT the time to PANIC and sell. Yes, we may see further slides. But if we’ve begun our trip down the Slide Side of the Circle, then hanging on until we’re back on the Climb Side makes sense.

You need to be alert to the potential of job losses – just ask the guys at Lehman Canada who are dusting off their resumés as we speak;

Carrying credit card debt is STUPID. Carrying line of credit debt is only slightly less dumb. And carrying any debt above 11% is moronic. Hey, are you so wealthy that you can afford pzzzzz money away?

Inflation is here, so the basics of life are getting more and more expensive. You better find cheap and cheerful ways of playing at home because it’s going to take most of what you earn to keep body and soul together.

This would be a good time to focus on building up that emergency fund. You are going to need it. Cut your spending back to the bone and ramp up your savings. Find a high-interest savings account and plunk it in there.

Use every trick at your disposal to build a safety-net. Increase your skills so you become even more valuable as an employee. Use all the gift points you’ve accumulated to provide yourself a cushion. Start a small at-home business that you can use to supplement your income.

This would be a really good time to start explaining how money works to kids. If you want a series, let me know. If you’re going to have to tighten your belts at home, you’re kids need to understand logically so they don’t go into a tailspin emotionally. Or worse, think you’re a cheap bastard that doesn’t ever want them to have any fun!

If you have family and friends who are oblivious to the crisis, now’s the time to lay down the law. Lots of people write me to tell me that they have family who are at or near crisis, and they feel an obligation to bail them out. You’re not going to able to afford it. You’re going to have enough trouble taking care of your own family. So now’s the time to have a heart-to-heart, tell your folks, your siblings, your partner even, that you’re taking the precautions to protect yourself. If they choose to be grasshoppers, so be it. That’s their choice. But don’t think for a minute that you’re going to have the ability – no matter how much you have the will – to save their sorry asses when the caca hits the fan.

This isn’t the end. And even though you may feel reassured that we’re almost through the worst of it because everyone is trying to maintain calm, it’s a lie. We aren’t anywhere near the end yet. Since Canada has never been the economic ‘leader’ when it comes to change, we probably have a year – maybe even two — or so to go before the worst hits home.

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