After my recent post, where I gave some tips for female investors who wish to become financially independent, I received some emails from women asking me to elaborate on the market crash that started in 2006 and culminated with the great recession of 2008. It’s not surprising that you would have questions, since only a small percentage of the population really knows what’s going on with the economy – most of them are working on Wall Street.
Billions of dollars seemingly vanished from the economy in the process, but where did all that money go? Can money simply disappear into thin air?
When it comes to monetary value, there’s always two sides to every story. In order for one part to gain money, another has to lose. For example, if I give you $5, I’ve lost that money while you’ve gained the same amount. Unless you provided me with a service of equal value, I’m the loser in this transaction. Easy enough, right? But when it comes to market supply and demand, it becomes a little more complicated as the estimated price of an asset can go up or down – or completely disappear without any money changing hands at all.
Let’s say you grow apples for a living. To grow one pound of apples, you have to spend $1. That’s your production cost. For you to make money off your pound of apples, you’ll have to sell them to someone – meaning there has to be a market demand for apples. If no one wants to buy apples, you’ll end up losing both your product and your production cost of $1. But if someone’s willing to pay for you product, you have the opportunity to make money. This obviously requires you to set a price higher than the original $1 that it cost you to produce said pound of apples.
The more people who want to buy from you, the better the opportunity for profit as you can raise your price according to the highest bidder. Not so much that no one is willing to make a purchase, but high enough for you to walk away a financial winner. You’re still holding the same amount of apples (1 pound), but because of market demand, your price has fluctuated in your favor. Now, this person who bought your apples can sell them to a third party. She can sell them now, while there’s a proven demand for apples on the market, for a slightly higher price and also gain from the deal. Or, she can sit on his purchase in the hopes of a continuing and growing demand, which will increase the price even further. But she has to act before the apples start to decay, because nobody’s willing to pay good money for rotten apple. However, if the available supply changes, as in another apple farmer entering the market with her own pound, the sudden apple surge will lead to lower market prices as people don’t have to compete as hard for the same product.
This is exactly what happened to the housing market, only with money loaned from banks and on a much larger scale. People were basically living on credit from the banks. This money came with a certain time frame, meaning if they didn’t pay back their money on time, the banks would end up short. In order for the banks to finance a loan of 500,000 to buy a new house, they’d have to have at least 100 mortgages of 5,000 each per month to make up for it.
Because the economy was in good shape at the time, with more jobs and financial freedom available, the interest rates on loans dropped. As real estate was considered to be one of the best options for private investors and folks in general, people started buying houses at an increasing rate. This created a surge in market demand. Due to low interest, people buying homes only had to pay around 4% interest of current market value, rather than the traditional 20%. Now, here’s where the story starts to go wrong. In order to generate money to finance the 4%, the sellers converted mortgages into publicly sold stocks. Since the housing market was in a gold rush, everyone wanted to invest in these stocks, both private investors, big corporations and banks. As long as people had money to spend, the stock prices continued to climb. This created a dangerous domino effect; people were buying houses like crazy, causing both housing prices and mortgage stocks to go up. Prices and costs started to outgrow the income available to the investors.
It wasn’t long before the inflated housing bubble became too big for people to keep up. As a result, more and more house owners had to default on their mortgages. Because of the induced time frame, it took too long for the banks to realize what was actually happening. As mortgage default increased at an alarming rate, house owners, banks and investors who’d bought these credit default swaps (mortgages converted into stocks) found themselves in financial trouble. Once everyone understood that the stocks were highly overvalued, the demand plunged and the bottom fell out the market. The banks were greatly invested in the housing market and simply didn’t have the available finances to cover these losses.
And so began the big crash of 2008. Stocks were crashing along with the defaults. The companies that had bought these shares suffered major financial setbacks and had no other choice than to eliminate jobs to stay afloat. Up until the burst of the bubble, real estate was one of the biggest assets in the US economy, worth trillions of dollars. Once the dominoes started crumbling, people found themselves without the means to pay back their loans. They lost their jobs, their savings and their homes and the economy was in crisis. The whole thing started in the States, but soon the whole world found itself engulfed in the failing markets.
At this point, the government had no choice but to step in and bail out the banks to prevent a full-blown economic depression. It was originally supposed to correct the crisis by 50%, but because the government was already in debt due to tax cuts and increased military spending, that never happened. But the economy did manage a slight recovery. Where did the relief money go? It got recycled into the markets, once again. People are still gambling on the stock markets, creating another bubble that is expected to burst any time now. The banks knew they would be bailed out, because the government couldn’t let the entire economy fail completely. They came out on top, even making more money in the process. Meanwhile, the common people had to bear the burden of their gamble, with many still suffering financially until this day.
The last crisis was never properly ended, the time frame has merely been temporarily extended. But with the bubble ready to pop and the additional costs incurred along the way, another big crash is coming, and it’s coming soon.
The game seems heavily rigged against us, which is why putting your money in recession-resistant commodities like gold and precious metals is the best way to protect your financial safety. The crash was caused by a bunch of ruthless gangsters. These people are currently setting up for another turn on their sadistic merry-go-round. Don’t become another victim. Educate yourself and start preparing for tomorrow, starting today.