How I Survived the 2008 Financial Crisis
It was a dark period in the world of finance and investment, and one that you still hear crazy stories about today. I’m talking, of course, about the 2008 financial crisis.
In 2008, the United States came incredibly close to experiencing a complete economic collapse. Much has been written about what happened, the events that precipitated the crisis, and whether or not we’ve learned our lesson. Could it happen again?
In reading this article, you’ll learn how I not only survived but thrived during the 2008 financial crisis, and how it’s possible to continue trading even in the face of dire economic circumstances.
What Was the 2008 Financial Crisis?
Most people know that there was a global financial crisis that spanned 2007 and 2008.
But few people really understand what actually transpired, including what precipitated it and what the far-reaching effects were. So let’s break it down.
In a nutshell, the 2008 financial crisis was an event that had devastating effects on Wall Street, Main Street America, and the entire banking industry in one fell swoop.
It required the presidential administration to pump billions of dollars into the financial markets to add liquidity and create a solution to avoid a complete economic collapse.
When Did the Financial Crisis Start?
To really understand the 2008 financial crisis, you actually have to rewind to a few years before.
As you may know, there was another huge financial crisis that occurred in 2007: the subprime mortgage crisis.
The subprime mortgage crisis was due to banks selling too many mortgages in an effort to offer more supply for the demand of mortgage-backed securities in the secondary market.
In case you’re not familiar with the term, the secondary market is the market that lets banks sell mortgages to various investors like insurance companies, the federal government, and pension funds.
Unfortunately, in the early aughts, this phenomenon made mortgages a little too easy to come by, and people who probably shouldn’t have been approved were.
After a while, the bubble burst. When home prices fell in 2006 or so, there was a huge series of defaults on the mortgages.
Because of the link to these mortgage-backed securities, the crisis didn’t just hit people who were faced with having to move out of their homes. It also affected those investors who had purchased into the mortgage-backed securities.
Things started looking bad as early as February 2007, when HSBC reported that their bad debt provisions from 2006 were anticipated to be 20 percent higher than expected, due to falling home prices.
In short order, some of the largest lenders in the U.S. began to file for bankruptcy.
In June of 2007, Merrill Lynch sold assets in Bear Stearns hedge funds due to the fact that they had lost billions due to bad subprime investments.
Merrill would, just a few months later, announce that they had a whopping $8.4 billion quarterly loss, directly related to the subprime investments.
In an effort to fix things, the Federal Open Markets Committee (FOMC) reduced the federal funds rate and the primary credit rate.
Unfortunately, it wasn’t enough to restore confidence: banks were afraid to lend to each other.
To keep some liquidity in the market, Ben Bernanke, the Federal Reserve Chairman, created a tool to give short-term credit to the banks with subprime mortgages. The idea was to put it to auction, and the banks would pay back the government with taxpayers unaffected.
Unfortunately, it didn’t work that way.
The crisis continued and reached a fever pitch in 2008. The banks that were part of the mortgage-backed securities deal were like pariahs, and nobody would lend to them.
Midway through 2008, it hit the fan. Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that guaranteed about half of all U.S. mortgages, were officially taken over by the government.
At this point, the government had tried to help out with bailouts, but finally called a kibosh on it, as it was not a sustainable practice.
This had a crippling effect on the banks. After no more government bailouts were offered, there was a flurry of terror within the banking system that culminated when Lehman Brothers filed for bankruptcy. This was when panic reached an all-time high.
How the Stock Market Reacts to a Crisis Scenario
What happens to the stock market in the face of a financial crisis like this? Basically, everyone and everything goes apeshit.
So, the House of Representatives decided not to approve any more bailouts on the grounds that Wall Street was being bailed out by taxpayers and had to face the consequences of their actions. However, they didn’t realize what would happen.
The entire global — not just national — economy suffered. Among the ripple effects:
- The Dow Jones Industrial Average plummeted a staggering 777 points. This made global markets go into a tailspin.
- The MSCI World Index and the FTSE fell dramatically.
- The cost of commodities went haywire. Gold was suddenly worth $900 per ounce, for instance.
- The Federal Reserve increased currency swaps with central banks in Europe and Japan.
There’s still more to learn from this story.
I want to share with you how I managed to actually profit from the 2008 financial crisis. And what you can do to prepare yourself for the next one.
— Tim Sykes
Editor, Penny Stock Millionaires