We are living through the Crash of 2008. This time will be long remembered and it will be used as a reference point, just as the 1987 Crash and the Great Depression are. So we should take stock of what is going on and what we are going through.
This Is Your Crash!
Just last month, in September 2008 world markets crashed and entered a time of great volatility. In the weeks since then governments have taken drastic action to save their banks. Panic has hit the markets. Uncertainty and fear grips most economies. And in the lead up to this crisis millions of Americans have lost their homes. And to top it off the nation of Iceland is on the verge of bankruptcy.
People want to know how far this is going. Where will it end? Is this a recession or a depression? Is this survivable or is society going to change from this year on?
History of the Crisis
Firstly let’s review the history of the current crisis. It springs in large part from the Sub-Prime Lending problem. Following deregulation of the banking and financing sectors in many countries during the 1980’s money was made available to people whose ability to pay was not as reliable as was previously required to borrow money.
Prime Lending is for those who have good credit rating and strong asset backing. Sub-prime means they do not meet that standard. Loans were also treated as an asset by the banks and having a large number of loans meant lenders could sell those off.
In the 1990’s many new lenders paid good commissions to sales agents for selling their loans to people. Consequently millions of people who were not good credit risks ended up taking loans.
The large volume of business made the lending companies appear successful. International banks were keen to invest their money into the USA home market because of the high return they could get. Everyone knew it was risky, but no-one expected to get burned.
Problems with the subprime lending game were evident in the early 2000’s as many loans began to go bad. In Sept 2002 USA Home Foreclosures were at a 30 year high.
Yet the subprime lending boom continued and more billions were poured into this risky business from people around the world who wanted part of the profit.
By early 2007 the problem had escalated. In the first two months of 2007 22 American lending companies went bankrupt. There were 1.7 million foreclosures in America in the first 8 months of 2007.
By August 2007 international fall-out from the Sub-Prime Lending problem became a house-hold topic in Australia as we realised that many Australian and international banks were going to be hurt from their lending to the USA Subprime players.
Over the following year the shock-waves of the problem continued to reverberate, until last month, September 2008, when two major home lenders in the USA, Fannie Mae and Freddie Mac were taken over by the USA Govt.
The repercussions on many international banks who were players in the USA home lending market, either directly or through various indirect connections, means that some banks have bone bust while others have had to be bailed out by their governments.
The recent $700 billion USA commitment and $1,370 billion Eurozone plans are just part of the scramble to stabilise the world economies.
The Bigger Historical Picture
This is not the first great crash and it may not be the last. What is happening here is part of a long history of people getting caught out while trying to make a profit. Prognosticators have warned for decades that balance of payment issues, high levels of personal and national debt, and other pressures spelt doom for our economies. Yet corrections, collapsing markets, booms and busts have been part of history for a very long time.
Speculation, Boom, Bust and Bubbles
What tends to happen over and over again is that people who are keen to make a profit and get rich quick will catch on to something that seems popular. They are all hoping to strike it rich and make their fortune. This feeds speculation, inflates bubbles and leads to some of the booms and busts.
Millions of people have crossed oceans and faced all kinds of hardship because someone found gold in some place or other. These Gold Rush enthusiasts left whatever they had in the hope of finding much more.
In the same vein investors and dreamers have all jumped on the bandwagon when various things looked profitable, often losing all they had in the hope of gain.
Bubbles in the Bubbling Economy
A “Bubble” is created when false expectations are set up and a venture is made successful only because people invest in it. There have been many famous Bubbles down the centuries.
Holland had tulip mania in the 1630’s.
In 1720 just about everyone who had money in England was drawn into investing in what is known as the South Sea Bubble. English and American investors lost huge amounts of money in the hope of profits from ships going to South America. Isaac Newton and Mark Twain are said to be among those who lost money in that bubble.
There was the British Railways Bubble of the 1840’s.
The US Bull Market of the 1920’s created what we know of as the Roaring Twenties.
Florida had a Property Bubble from 1920-1925.
More recently we have seen the Junk Bonds in the USA, the Japanese Bubble economy of the 1980’s, the Dot.com boom of the 1990’s, Hedge-Fund Mania and even Enron Mania.
What is Really Going On?
So much for the background. That is cold comfort when we still don’t know where we are going and how bad it’s going to get. To take this discussion further I need to discuss what is really going on. That is the topic of a follow-on article which I’ll be posting in the next week.