The Global Financial Crisis and Its Repercussions

The global financial crisis of 2008-2009 is an ongoing major financial crisis. It became prominently visible in September 2008 with the failure, merger, or conservatorship of several large United States-based financial firms. The causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.

Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global credit crisis, deflation and sharp reductions in shipping resulting in a number of European bank failures and declines in various stock indexes, and large reductions in the market value of equities (stock) and commodities worldwide.

The credit crisis was exacerbated by Section 128 of the Emergency Economic Stabilization Act of 2008, which allowed the Federal Reserve System to pay interest on excess reserve requirement balances held on deposit from banks, removing the longstanding incentive for banks to extend credit instead of hoard cash on deposit with the Fed. The crisis led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis, and a decrease in international shipping and commerce. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change, evolving at the close of January into a currency crisis with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund. The crisis was triggered by the subprime mortgage crisis and is an acute phase of the financial crisis of 2007-2008.

Russia‘s economy hit

The Russian financial crisis of 2008-2009, part of the world Economic Crisis of 2008, is an ongoing crisis in the Russian financial markets which stemmed from the US sub-prime mortgage crisis and has been compounded by political fears after the War with Georgia, and by the plummeting price of Urals heavy crude oil, which has lost more than 70% of its value since its record peak of $147 on 4th July 2008. While according to the World Bank, Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than would otherwise be the case. Swift fiscal management and substantial financial reserves may have protected Russia from deeper consequences of this shock.

Reasons Why Gold Will Rise In 2009

Secretary of the Treasury Paulson talked of the current crisis being potentially worse than the Great Depression. Alan Greenspan told Congress that the financial meltdown had left him in a “state of shocked disbelief.” Reputable economists are saying “this looks an awful lot like the beginning of the second Great Depression.”

U.S. consumer confidence has fallen more sharply than in any period since records began in 1978. Since September 9, we have seen the nationalization of Fannie Mae, Freddie Mac and AIG; the socialization of the auto industry; the disappearance of the investment banking industry; a $700 billion Bailout with another stimulus plan approved recently; the bankruptcy of Lehman Brothers; the “breaking-of-the-buck” of the supposedly rock-solid money market funds; the largest bank failure in history; the implosion of global stock markets; the collapse of home values, retail sales and consumer sentiment; the biggest fall in industrial production in 34 years; and an unprecedented shattering of confidence in both commodities and financial assets. It is increasingly apparent that fear predominates. Individual investors are abandoning anything with the slightest hint of risk. Last year was the worst year for global equity markets since the Great Depression, with the Dow suffering its worst annual decline since 1931. Investors are pulling huge amounts of money from hedge funds, stock mutual funds and bond mutual funds in one of the biggest flights to safety the financial industry has ever seen. Defensive Asset Class have assets that have similar risk/return characteristics, are positively correlated with each other and are traditional inflation hedges that are negatively correlated with stocks – they do well when stocks do poorly. Historically, the principal Defensive Asset has been gold. Of the major assets, only Treasuries and gold have escaped the selling panic that has gripped the markets. Gold rose 5.4% over 2008, ending the year above $850 a troy ounce. Gold bullion reached $1,030.80 in mid-March and Mints around the world ran out of popular gold coins and small gold bars after the collapse of Lehman Bros. in September. The U.S. rate cut to virtually zero lowers the opportunity cost of buying gold and gold ETF holdings have exploded from 7 million ounces to over 30 million ounces in less than four years Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications.

Gold’s value rise arises from its use and worldwide acceptance as a store of value and a safe haven. Other precious metals have also been classified as Defensive Assets, but have not performed as well as gold during this crisis. For example, investment accounts for about 90% of the demand for gold, while investment makes up only one-third of the total demand for platinum. Therefore, although gold has done well, platinum’s demand from industrial uses has fallen rapidly, particularly because of the high concentration of uses of platinum in new automobiles – an endangered species in an economy in which automakers are begging for funds from Washington just to keep them afloat. Gold’s price has been bolstered by the view that it is a safe haven in times of economic or political uncertainty, while platinum’s industrial demand has fallen precipitously. Platinum reached its all-time high of $2,267.00 per ounce in March, but fell like a rock from there, as did silver. Platinum fell nearly 60% from its March peak, while silver fell 47%. The last time that gold traded for more than platinum was January 21, 1994, when gold closed at $381.70 and platinum at $380.90.

7 Keys to Turn a Financial Crisis Into Your Best Opportunity

This is a simple article about one family (ours!) who dared to dream big 4 years ago and finally climbed out of financial ruin. Many families, including ours, were in financial crisis long before the wall street meltdown and current economic concerns hit. A growing majority simply don’t have enough cash to make ends meet, much less investing in their future. Combine this with the recent job losses and you have a recipe for a major financial crisis.

Finding opportunity amidst the financial crisis involves thinking about your situation in a brand new way.

What is it that you’re after?

The way money relates to “freedom” lies in the ability to devote your life to causes that you deem as more soul serving than working to make ends meet. Whether you are after just a little more each month or getting to a position where you no longer have money worries, each family can generate what they are looking for with some focused attention on a few key factors.

Our family is working towards financial freedom and early “retirement.” As the children of parents who have had very little financial success, my husband and I have seen how years of money worries can smother hopes and dreams. We knew we wanted to avoid repeating the same circumstance in our lives, however, without understanding a few basic rules of financial wellness we made a mess of our own finances soon after getting married.

There is a silver lining in all crisis though. Financial meltdowns can serves a huge opportunity for you and your family with some work and a fresh perspective.

Why is a financial crisis your best opportunity?

The problem with being constantly cash strapped is that over time it can seriously affect how you perceive opportunity in the world.

I’m going out on a limb to say that since there is no shortage of opportunity, a limited perspective is one of the major reasons why it is so hard for families to recreate their bank balance. A limited perspective makes it very hard to overcome obstacles and hardship. The comforts of stability do not require much personal growth and learning so a crisis of any kind is amplified by how ill prepared a person is to handle it.

We lived for 4 years on the verge of bankruptcy and nothing sucked more than being a slave to our own circumstance! The good news is that a financial crisis turns your life upside down. Crisis has always motivated people to make great changes in their lives and your financial crisis can be the same gift of change, if you choose.

The following 7 keys will help you see a financial crisis from a new perspective and turn it into your best opportunity:

1.  Accept Personal Responsibility.

Regardless of the perceived cause of your crisis, accept responsibility for it. To quote a popular saying, “you cannot change what you don’t accept.”  While external situations may have caused additional hardships, take back control for the fact that the solution now lays in your hands.

If your financial slop has been brewing over a longer period of time, begin to ask yourself probing questions about how you view money, yourself, success and other successful people to greater understand why opportunity may continuously elude. (I’ll include a book list for the next article which will help you probe deeper into this.)

The main point is that people who are personally responsible no longer feel scammed, cheated or defeated because they take advantage of each situation as a learning opportunity. Become solution oriented and forget spending time thinking about things that do not change your circumstance.

2.  Don’t Rely On Others To Make It Easier.

As soon as you decide that you cannot rely on others for your financial well being, you will no longer accept less than you deserve. Are you holding out for a little while forsaking the opportunity to Be and Have more?

We soon realized what a huge motivator “rock bottom” can be! Continuous “help” from others is a problem because it  serves as a band-aid that only delays the need to hit “rock bottom” and become resourceful enough to figure out a solid plan of action. While assistance can be a lifesaver for the short term, don’t exchange it for the reward of being able to choose how you want to live.

3. Accept that There Is No “Secret” Formula.

Call it the “lottery mentality” in the age of  instant gratification. We, along with so many people were waiting for the “big reveal” on what it takes to be financially independent. There must be something they’re not telling us? One of our biggest moments of personal growth was realizing that we too can have the same success as others. There is no “secret” that we need be privileged enough to have access to!

All of the highly successful people we have come into contact with have only been willing to do a few key things that others are not willing to do.

Financial independence comes with a price though. There is a price to pay for everything. Do you have the discipline to delay your gratification in order to make sacrifices with your time and effort until you reach your goals?

4. Study To Grow Larger Than The Problems You Face.

Most of us eventually arrive at our destination not because we’ve intended it to be this way but because we’ve fallen asleep at the wheel. You can be sure that the one thing that greatly influences every financial decision in your home is your own personal mindset about money. Use this crisis as an opportunity to understand how your thinking differs from those who are in the financial position you want to be in.
 

Thinking about our personal views on success and money was a lot of fun although frustrating and shocking to admit that we had some pretty “poor” ways of seeing ourselves. Once you begin to shift your perspective you will be in a much better position to take steps towards fixing your financial situation.

5. Invest In Yourself First.

YOU are the best return on your money. If you want to break past the ceiling or plateau of J.O.B. income then it pays to invest in yourself.

Consider starting a business. You don’t need to bet the family farm to gain big rewards either. Start small. If you don’t have a business yet, consider that the only way to build something for the future is to generate multiple streams of income. Begin with one additional income stream outside your current job or income source.

Examine your financial goals, talents and passions and then take some steps to invest in yourself and your future.

6.   Learn To Take Calculated Risks.

The day we finally became sick and tired of our limited choices was the day we decided to take our first bold steps towards a new life. We were able to risk what others do not because we felt we didn’t have much to lose. Despite popular advice, we chose to risk it all because the life we had would always be waiting for us if we “failed.”

Do you take the risks required to advance towards your dreams? When you do take a risk and it doesn’t provide the results you seek, does the cynic take over and you give up?  Mature your “entrepreneur spirit” by taking small calculated risks that will season your tolerance level for taking bigger risks in the future .

Don’t let any “problems” along the way become a roadblock for you! The only way to move past problems is by paying special attention to Key #4 – “Study to become larger than the problems you face.”

7. Be Selective.

Too many people take financial advice from people who are not walking their talk. Is your “adviser” earning a wage from his advice or is he financially free because of his advice? Big difference.

If it is financial abundance you are seeking then it pays to learn a little about what the rich do to get wealthy. How do they think, how do they work, how do they see assets, liabilities, time, and opportunity. Their perspective is much different that what you will find on TV or from the popular “money guru’s” currently dispelling their advice.

Also remember that much of the so called wealth you see around you is swimming in debt so never feel envy or competition towards others.

In Summary Tune out the negative and focus on what YOU want for your family. Stop buying into the crisis, set a new course and be willing to go the distance. You can do this because we managed to do it, even when everything was against us.

Find out more about the valuable resources that that saved us from ourselves on my blog.

2007-2009 Financial Crisis Cost Tax Payers $30 Trillion

2008 has come and gone and feels like a distant memory. The economy is back on its feet and the banks which were basically devastated because of the crisis or responsible for creating the crisis are in the best of health.

So it begs the question: “How Bad Was It? Well, I just finished reading a research paper from the Federal Reserve Bank of Dallas; entitled: How Bad Was it? The Costs and Consequences of the 2007 to 2009 Financial Crisis.” And in the report, the researchers estimate that the recent financial crisis cost our nation $6 to $14 trillion in losses using standard estimates but using other reasonable assumptions, the loss may be closer to $30 trillion if you add in other long term costs directly related to the financial crisis. So what is this loss relative to the size of the U.S. economy? As of the latest figures the size of our economy is over 16 Trillion dollars. So the loss was huge. More on this later.

Breaking down the $6 to $14 trillion loss estimate is based on a differential – between what the economy is and what it could have been without the financial crisis – so, of course, this estimate is based on a lot of assumptions – but even so, it’s the first analysis I have seen on the cost of the financial crisis. And it’s important because it tells us how expensive… government policy decisions can be… for American taxpayers… because if you divide that cost across all tax-paying American households, it translates to $50,000 to $120,000 per US household at the basic level. And that’s just a conservative estimate.

The study also points to a dramatic drop in total wealth due to lower wages as a result of the jobs disruption caused by the crisis – with US household net worth down $16 trillion from mid 2007 through the beginning of ’09 – because roughly one-fourth of all household wealth evaporated in a matter of month. How did it evaporate? Through lower portfolio values, lower home prices, lower money in the bank which shook household confidence severely. And on this point – the point of total wealth and net worth – seniors were hit particularly hard – not only from the drop in the value of their stock and bond portfolios, but through the lower interest rates which were necessary to keep the economy afloat. I don’t have to tell you how this low interest rate policy represented a significant loss of income.

In addition to the financial impact, there are also the psychological costs of joblessness beyond lost income. During this recession, more than 8.7 million workers lost their jobs and faced extended bouts of unemployment. By June 2009, 12 million working Americans were either unemployed or underemployed – with low paying or part time jobs that were below their skill level – and many became so discouraged that they just stopped looking for work altogether. This creates psychological burdens that go far beyond lost income – burdens-such as the cost of being forced out their homes for not making mortgage payments, having to forcibly split family units to make ends meet, and so on.

Data also shows that the average number of households formed – through marriage or partnership – dropped to a third from 1.5 million per year to merely half-a-million – mostly because many working-age children who would normally go out and stay independent, opted instead to staying with their parents to weather the downturn.

Also consider that this lack of employment has meant more unemployment payouts by the government – the government uses borrowed money which increases government debt just at a time when less tax money is coming in. This causes government debt and budget deficit levels to expand as the Government scrambles to get money to people who don’t have jobs.

So while the government did step-in with unprecedented fiscal and monetary action to prevent a full-blown depression, such intervention had significant costs such as a swollen federal debt, an expanded Federal Reserve balance sheet and increased regulation for years to come, which attempts to put in place new banking controls so a similar crisis would not happen again.

So when you add it all up in dollar terms, the loss will likely be closer to $15 to $30 trillion from wealth reduction, with up to $14 trillion more for national trauma and lost opportunity and $12 – $13 trillion in extraordinary government support. And that’s without counting the repercussions of this crisis abroad.

The Dallas Fed report also cites damaged public trust in government-supported institutions and the capitalist economic system – where too big to fail financial companies that precipitated the crisis were given massive dole-outs and preferential protection – and walked away largely unscathed by the crisis they were largely responsible for creating/// while losses, unemployment and significant lifestyle disruptions were disproportionately borne by taxpayers.

So, coming back to the question of how much the crisis cost in easier to understand terms, The Dallas Fed puts the loss at 40 to 90 percent of the entire 2007 output of the United States.

Putting it another way, we lost about 1 whole year of economic output. One whole year.

This is basically why the economy has taken so long to recover back to its former levels, and no one knows exactly how long it would take to totally heal from such a devastating blow.

So when collective circumstances and actions – such as bad loans by banks, rating agencies failing to do their jobs, lax regulatory policies, reckless lending, low interest and easy credit – when these collectively cause havoc, they impact the economy over the long run and we all pay a very significant price – individually and collectively as a nation. So my hope is that my listeners – American taxpayers – understand that policy decisions and private actions tremendously impact our lives and it pays to be sure that your own financial house is in order. You may be able to count on the economy for a while, buts it’s entirely up to you to understand what is in your control and what is not. And to make the right money decisions to protect you from events that are not IN your control.

This means creating a savings pool, investing wisely, spending reasonably and thinking and preparing for the future. If you had done this well, the distressing circumstances which almost brought America to its knees, may not have had as devastating effect on you as it did on so many others. And this, my friends, is what it means to live your one best financial life.