The Financial Crisis of 2008 and How It Affects You (Part 1)

The financial crisis of 2008 could have been avoided. What started out as a risky business strategy to gain more profits ended up creating a chain reaction the world over that had nearly crippled financial systems. Most people who had closely followed the financial crisis in 2008 (AKA Great Recession) pin the blame on the sub-prime mortgage lending practiced by large banks across America and the many corporations that have been tangled up in it.

Sub-prime mortgage lending (view 41 pg PDF from UNC) literally means that banks offer to lend money to people to buy homes that they couldn’t afford. But on the upside, they reassured them that everything would be all right just as long as they meet their payments. Sounds like a foolproof plan. This had exposed the craze that Americans had over credit and how countless families across the country were living beyond their means simply by availing of “easy money” since the interest rates were so low. This created the illusion of wealth that had somehow captured the hearts and minds of American families that it was okay to keep spending and spending even if you were living beyond your means. Hence, the major economic collapse.

2008 Financial Crisis - Ben Bernanke

It’s kind of like setting yourself up for a huge fall, and the fall came crashing down like never before. The effects were felt far and wide, the world over in fact, and when the dust of the 2008 financial crisis settled, some of the oldest banks in the world closed shop, and millions of Americans were heavily affected – with jobs and life savings being wiped out.

The result of the crisis showed just how vulnerable the middle class is and how huge the disparity is between them and the rich.

Looking at the bigger picture, we have seen that the world’s GDP has been affected by trillions of dollars wherein we haven’t fully recovered yet from the financial crisis 2008 even up to this very day. Various economies have experienced a recession and countless families are scrambling to save their homes, their jobs, and their savings as well.

Even if you haven’t been directly affected by the financial crisis, you’ll realize that you have still felt the pinch in one way or another. The most far-reaching effect of the financial crisis 2008 is the impact it has on the value of the dollar. Because of 2008, the value of the dollar has been losing ground just like their other counterparts such as the Euro, and the British pound sterling as well. This means that for every dollar that you have, you will be able to purchase less than what it used to. This is what we call the purchasing power of a particular country’s currency. More than that, salaries have remained at a standstill with fewer and fewer raises and bonuses being given as well. And that’s even if you’re lucky enough to have kept your job.

And when we talk about purchasing power, this is where inflation comes in. The higher the inflation rate gets, the lower your purchasing power becomes for every single dollar that you have. And if you haven’t noticed, 2008 experienced the highest inflation rates in that decade. And here, we see different courses of action taken by the European Central Bank and the Federal Reserve during the financial crisis that began in 2008. The former raised their interest rates, causing a sharp increase in inflation rates; while the latter dropped theirs to nearly zero and was able to cut inflation. What these two contrasting actions bring into focus is the fact that inflation can have devastating effects when left unchecked. On the other hand, deflation can also have devastating effects wherein prices are so low that debts are heavily incurred by businesses that would cause the contraction of a country’s economic growth.

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Comments

  1. Bertie Joske says:

    So everyone keeps talking about the national debt but does it mean the government owes the citizens like $17+ trillion or do the all the people of the US owe different countries that money because of the government borrowing money from them? Always wondered this. Thanks!

    • Jeroen Waning says:

      Bertie, thank you for your excellent question! The media focuses so much on how much the debt is and how quickly it is increasing AND that most of it is owed to China. The fact is, the US government does owe China, but they are NOT the biggest holder of our debt.

      So who owes who you ask?

      Well the US government owes many different creditors but more importantly, they owe YOU, the tax payer, your retirement money (i.e. Social Security). Here’s a more detailed explanation from About.com: http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm

      Since the government isn’t too concerned with paying you your full worth when you retire, it is important that you are proactive about saving for your own retirement, and we have written an article to help right here: http://www.sacdc.org/saving-for-retirement-financial-advice-for-young-people/

      Again, great question!

  2. Taylor Leverette says:

    People say that money and other material possessions cannot provide true happiness, that these cannot answer all the problems in the world, and that these do not measure the character of anyone. The assumptions might be true, but still, financial capacity is important to survive. The harsh reality of life is that one cannot live and be self-sufficient without money or any possession with monetary worth – and companies are not immune from this.

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