Crisis

Crisis has become a much discussed topic in the media today. Some countries were more influenced by the collapse in the construction sector, some less. However, I would not exaggerate by stating that all the world experienced consequences of the crash of 2008. Some say the recession is over, some say not yet, and other say the next wave of crisis is on the way. In order to form as accurate opinion as possible we have to understand the causes that led to the crash. If we understand them, I think we will be able to predict what will happen next. People who do not study history are doomed to repeat the same mistakes that people of the past made. In my previous hub I tried to enumerate the causes that led to the economic and financial bubble that preceded the crisis. I think that most of the causes for the formation of the bubble that I mentioned can also be attributed to the development of the most recent crisis. There are more which will also be covered in the hub. I think that we can find out causes for bubbles and collapses and there are sure ways to prevent them. I think ‘we the people’ have an important role in the process. So, let me go to my reasons.

Favorable and easy credit conditions created a bubble and caused the financial crisis

I have already talked about this cause in my previous hub, but I consider it as one of the top reasons for both bubble and crisis creation and want to stress the danger of economy that runs on debt. I do not know about you but I see money which is lent as causing more trouble than giving benefits. You see, money does not fall from the sky. Central banks print money from time to time. You cannot do this unless you want to go to prison. So, if you borrow money from a bank, you will always have to give back more. This means that you will have to get the amount that you borrowed, plus interest. You know that many people buy houses, cars and etc. on credit. You also know that most businesses borrow money from banks for working capital and other reasons. Now, in order for all that money which is borrowed from banks to be paid back there has to be an increase in money supply from central banks. Otherwise, money will never be paid back, because there will not be enough money in the economy to give back that extra interest which you need to give back to a bank. That leads us to a conclusion that central banks always print money and the amount of money in the global economy increases every year. When the markets are flooded with money a bubble is born. When it explodes we have a crisis. If loans would not have an interest attached to it, we would have a completely different situation. Then there would not be banks any more. However, as long as economic expansion is based on debt creation we will always have booms and crises as a result of those booms.

Housing bubble made a huge contribution to the crisis creation

I am deeply convinced that construction sector was a catalyst in the previous boom and as such it was also one of the main culprits of the 2008 crisis. A collapse in the field made a dent in the ship of the global economy. If you understand housing sector you can see how it is connected with other market spheres. When it prospers, a lot of other sectors blossom together with it as the sector increases job creation in other sectors. When it collapses very many secondary sectors go bankrupt, because people stop using various services or buy goods which are not of primary importance (food). Construction is a vast field in economy and much of easy credit went to this specific field. As we know the market never needs uncountable number of houses and buildings. Space for houses is limited and it will never come a day when everybody will have a house as not everybody can afford one. So, when a demand for houses is met, construction booms always end and the sector can be suppressed for decades. Now, I hope you can see that when money stopped going into the sector due to bankruptcies, exaggerated supply and severely decreased credit, the sector collapsed causing crisis to overwhelm other market fields as well.

Rise of oil always leads to crises

When prices of oil rise you will definitely have a financial crisis sooner rather than later. We could say that oil is a global currency. All the other prices can be measured to the price of oil. Why? Because oil is used in almost all industries and when oil price increases it has affect on the prices of all primary need products and services. I hope you remember what the price of oil was when crash came and what the prices of all products and services were. There was a huge inflation in all possible market sectors, with a few exceptions. It usually happens that oil rises together with other commodities. Some say, that gold pushes all commodities up and is the best instrument to save your money when inflation comes. I think that the same thing can be said about oil. Although gold and silver can replace world currencies and world currencies can replace gold and silver, what is going to replace oil? I think that nothing can do that at present. There will pass a lot of time when the world will switch to some other source. Not sure if it ever happens though. So, you can hedge against the risk of inflation by buying oil in the futures market. You will preserve your capital in this way.

Absence of regulation in derivatives’ market and complex financial instruments caused the financial crisis

Alan Greenspan was warned about the possible crash in the derivatives’ market and urged by some members by Commodity Futures Trading Commission to interfere in the complex and mysterious market. However, as Mr. Greenspan was strongly holding to the position not to interfere and to allow markets to regulate themselves; nothing was done and deregulation caused a wave of crisis across the board. If you asked any economist what derivatives market is I think most of them could not give you an explicit answer. The same can be said about various complicated financial instruments like CDO’s and MBS’s which average person does not understand. Those instruments were offered to the general public to buy and the makers of those instruments were selling them in the market profiting from these operations and causing imbalance in various sectors and expediting the crisis.  One thing for sure: there has to be absolute transparency in the derivatives market. Otherwise, it can cause much bigger problems than we saw in 2008.

Sudden decrease in credit supply brought about the crisis

In my previous hub about market bubbles I indicated large money supply from banks as one of the reasons for a bubble development. Now, I will say that the sudden cutting of that supply brought about crisis that we saw. How is that? In the times of boom money from central and commercial banks floods financial markets and global economy. This causes all economy to boom. However, when there is a sudden cut in money supply everything stops, because money is the blood of any economy. Money starts coming out of the system and everything starts collapsing as there is no power to keep market standing. When a human being loses a lot of blood he faints and can even die. When economy loses a lot of money it collapses and can go into stagnation for a decade or even more. That’s why a sudden decrease of money in any economy as well as increase is not ‘healthy’. Increase of money as you know causes inflation and decrease usually causes deflation. We want none of those. We want global economy functioning ‘normally’.

Massive bankruptcies triggered the crisis

Most economists think that Lehman Brothers bankruptcy was that dent that really triggered crisis. I would agree with that, but I am absolutely sure that crisis would have come anyway, even if Lehman Brothers survived. However, bankruptcies like this had a lot of impact on acceleration of the crisis which was already inevitable. Still one bankruptcy can cause a chain reaction and the result would be a lot of companies out of business and a huge number of people out of work. This is particularly felt when some giant company which employs thousands of people goes bankrupt. Consequences of this can be hard to predict. That’s why there was a question raised about necessity of reducing the size of this kind of companies, especially banks. If one company would split to a number of companies and bankruptcy of one would not necessarily influence bankruptcy of another, then the danger of massive bankruptcies could be avoided. Can you imagine what happens if a bank which is bigger than country’s annual GDP goes bankrupt? Terrible! Having this in mind some analysts coined a phrase ‘too big to fail’. They had in mind those mega banks and companies which lined up to get bailout money from governments and central banks. However, it means that these companies have good excuse to take tax payers’ money and dictate their rules to the governments of the world. Is that how capitalism supposed to work? I guess not. That’s why I think all governments should promote small and medium business. If small and medium business were strong there would never be a crisis like we saw in 2008. Now, when everything is ‘global and big’ sinking of one big guy causes a lot of trouble for everybody. We need less dependence on large corporations. It would decrease risk of global economic failure.

Over optimistic analysis of the economic situation from expert analysts did not allow people to see coming crisis

Most people rely on ‘expert’ analysts and acknowledged market gurus. People do not spend enough time to analyze the ongoing situation in economy. They simply trust that if ‘such and such’ economist said ‘this and that’, it is for sure. And what were the expert analysts doing just before crisis hit the global economy? They were painting a very bright picture of expanding economy, showing good statistical data from various market sectors and suggesting which stocks or commodities to buy. All the guys that were trying to warn us about the coming collapse were ridiculed and kept out of media. I think there is a psychological problem attached to the entire story. People want to hear only good news and that’s what the experts were doing. The experts were like musicians from the Titanic. They were playing music and amusing people till the very end. Do you want to hear only good news? What if bad news can save your wealth, business, savings and etc? We should learn to be both optimists and realists and see things as they are. You can turn your life wherever you want, but you are not at the wheel of global economy and being optimistic about it is quite dangerous. You cannot turn the wheel. So, you should know what to do about your ‘home economics’. And if you know what you are doing, then you can be very optimistic about it.

Crisis came and will always come because this economic system is extremely flawed and will not sustain itself for a long time

Some economists see it and they called the previous crisis – a systemic one. It means that there are too big flaws in the system and crisis simply had to come. It is not enough to change a few laws or rules in trading, lending and etc. It can be said both about global economy and social security system. In my opinion they will both collapse. Why? Firstly, I think that economy that is built on borrowing cannot be sustained. It will always end up in booms and crises. Secondly, nations have too big governmental bureaucratic apparatus which sucks too much tax payers’ money. True democracy should give more power to ‘the people’ and less to governments. Present social security and medical system is very flawed and also sucks too much public money. If governments have to borrow to pay pensions, there is something wrong with the system. It cannot last for a long time. Thirdly, most countries will have to default if they intend to continue operating in the same way as they are doing now. National debts of the countries will most likely sink those countries.

So, I think that the crisis of 2008 is not over and we are going to see the next wave of crisis which would end up with a complete economic collapse. I wish it did not happen, but I fear that my wishes will not be fulfilled. Time tests all ideas and opinions. I believe we have to be careful about money management and risk taking. It will help us to go through the coming changes in global economy.

1. Buy some valuable things. If you managed to save up during booming times crisis is a good time to buy things as prices for houses, cars and etc. are very low. That’s why it is better to buy during crisis than economic expansion times. Other people will desperately need cash and you will be able to buy what you decided not to buy at inflated prices during prosperity times.

2. Start a business. Sounds crazy, but during crisis a lot of companies and firms go bankrupt and in this way a lot of free space for you to start business appears. That’s probably the best time to launch new enterprises.

I know that most people have many financial problems and I think that advice above is not suitable for you. You need to survive the crisis before you can prosper. Below I have outlined some points for you to help you to go through the crisis. I hope to expand the section bit by bit.

The economic and financial crisis that hit the world was unexpected for many people. Very few people imagined that economy can go down so fast, employees would lose jobs in such big numbers as we experienced or that there would be a credit crunch where money lenders would stop lending at all. We must admit that everything is different now and we have to change in order to survive and finally prosper. If you have serious financial problems there are a few things which you cannot neglect if you want to survive the crisis.

1. First and foremost, if you want to survive during the crisis you have to do everything in your powers to get out of debt. If your house, car and other stuff has been bought for borrowed money you are running a high risk to lose them while going through the crisis. I would recommend paying off each thing one after another. If you are employed, you are more secure, but what would happen if you lost your job? There is no doubt that the bank would take all those things away from you. In case you are still employed, I would advise you to curb your spending habits and try to set aside some money so that you could get rid of your debts. If you are not used to saving you could experience some difficulties, but believe me, you will feel a great relief after paying at least some of your loans.

Let me end my hub with some quotes about crisis. Just to end on a little bit more relaxed note.

“Being on a movie set is like one long financial crisis.” John Cusack

“Blaming speculators as a response to financial crisis goes back at least to the Greeks. It's almost always the wrong response.” Larry Summers

“Close scrutiny will show that most "crisis situations" are opportunities to either advance, or stay where you are.” Maxwell Maltz

“Sooner or later comes a crisis in our affairs, and how we meet it determines our future happiness and success. Since the beginning of time, every form of life has been called upon to meet such crisis.” Robert Collier

“Try to relax and enjoy the crisis.” Ashleigh Brilliant

“A crisis is a close encounter of the third kind.” Guy Finnley

“The Chinese use two brush strokes to write the word 'crisis'. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger-but recognize the opportunity.” John.F. Kennedy

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