Cause & Effects of 2008 Financial Crisis

Before the 2008 financial crisis the national debt of the US was 10 trillion, now it is over 20 trillion. How did this happen? Basically, easy monetary policy in the wake of the dot com stock market crash inflated an enormous bubble in the US real estate market.

Easy money in the hands of spendthrift US consumers enabled them to buy a lot of very expensive real estate. Additionally, during the housing boom years of 2001-2007 US home owners repeatedly refinanced their homes to fund extravagant lifestyles and live far, far beyond their means.

Their extravagance fueled strong economic growth and it became a self reinforcing circle. However, the momentum of the debt fueled US economy began to sputter in 2007. Then at the outset of the consumer induced 2008 financial crisis these proverbial “grasshoppers” decided to flake on their debt payments.

2008 Global Financial Crisis
When the debt fueled financial bull market collapsed it unleashed a financial tsunami onto an unsuspecting world.

Why was the 2008 Financial Crisis Highly Contagious?

Unfortunately, global banks were fully invested in their toxic debt. As a result, the global financial system began to collapse like a house of cards.

Therefore to mitigate a complete financial disaster, the extravagant debts of US consumers ended up on the EU and US government books. Does this reflect the values of “honest hard working families”? Absolutely not!

Paradoxically, this absurdity is the cause of the 2008 financial crisis. However, the effects of the consumer induced 2008 financial crisis are myriad ranging from economic collapse to extremism and famine.

2008 Financial Crisis Bank Bailout

Due to the severe magnitude of the potential mortgage defaults the entire global economy faced a severe systemic risk. Therefore, without government involvement it would have triggered a systemic collapse in the global banking system.

So politicians needed to bail out the banks or the collapse of the western banking system would drag the world economy down with it.

Essentially the bank bailout during the 2008 financial crisis was actually a middle class bailout. However, it is not politically possible to call it what it really is.

The electorate in the US still refuses to acknowledge the obvious, it is an inconvenient truth. Politically it is easier to just blame Wall Street rather than Main Street.

Seeds of the Next Financial Crisis

All that US consumer debt was then combined with fiscal and monetary stimulus to re-inflate the US housing bubble and the US economy. As a result, trillions more in debt was piled onto the US government books and the seeds of the next financial crisis are sowed.

School project Cambodia
How can you put US consumer debt to good use?

Additionally, mortgagors in foreclosure were granted extremely lenient terms by the Obama administration. This included 2 years of living in default in their foreclosed homes.

As a result, they made no mortgage or rent payments, real estate tax payments or home insurance payments for 2 years. Otherwise, they would have been “homeless”. Essentially, they got to “have their cake and eat it too!”

Plus, these careless consumers enjoyed the economic benefits as the US economy was being reinflated with a boatload of new debt. Needless to say, Obama was reelected in 2012. Nonetheless, the insatiable appetite of the American consumer for free money resulted in the election of Donald Trump in 2016. His titanic tax cuts in the face of ballooning deficits are just more lipstick on a pig.

Consumer Subsidies Exacerbate US National Debt

Now, the electorate in the US voted to nationalize health care, baby boomers expect their social security checks to be paid on time and there is also a looming $1 trillion dollar student loan bubble that is going to blow up at some point.

What is the answer politicians come up with? More debt on top of more debt and more debt that the US is never going to pay back. This is the democratic solution to the economic problems of the western democracies.

Who Really Paid for the 2008 Financial Crisis?

By refusing to take responsibility for their personal debts the US consumers blew a hole in the fiscal balance sheet. To deal with the flood of consumer debt central bankers are forced into monetary experiments such as quantitative easing and negative real interest rates.

Unfortunately, these experimental monetary policies of the US and the EU creates massive excess liquidity in global markets. This overhang of defunct consumer debt from developed economies floats around the world and decimates those who are the most vulnerable financially.

The effects of this easy money sloshing around the global economy creates inflation in some places and deflation in other places. The result is global extremism, famine and destitution.

Central bankers are in uncharted water and the results of unbridled consumerism are now coming home to roost in ways they do not understand.

When is the Next Financial Crisis?

It is not surprising that not one dime of the 2008 financial crisis bailout money has been been paid back. Additionally, the 2008 financial crisis ended 10 years ago but none of the emergency financial measures have been repealed. Plus, we must factor in the fiscal effect of the Trump tax cuts to the tune of 1-2 Trillion USD in additional debt.

Can you imagine what the next financial crisis will be like? To be sure, next time there will not be a government bailout for profligate consumers. The governments of the US and Western Europe are essentially already bankrupt.

However, this has not slowed down the American consumers. In fact, they are spending more money now than before the 2008 financial crisis. If not for China, Japan and South Korea propping them up, the “house of cards” debt structure of the US would have come crashing down already. This cannot continue indefinitely.

Although the precise timing of the next financial crisis is not certain, rest assured it could happen at any time. This is especially true if the US gets aggressive in the South China Sea and antagonizes their biggest creditor – China. 

Unsavory Effects of the 2008 Financial Crisis

Global extremism has its roots in economic instability. The US shale revolution is a perfect example. Post crises easy monetary policy in the US caused over investment in the shale oil industry. As a result of over production, the global oil market collapsed.

Malaysian Ringgit
Extreme Volatility in Malaysian Ringgit has roots in the 2008 Financial Crisis

The collapse of oil destabilized many developing nations dependent on stable oil prices. Examples include: Libya, Iraq, Nigeria, Sudan and Syria. Extremist groups such as ISIS, Al Qaeda and Boko Haram thrive in unstable environments such as this.

Additionally, the withdrawal of US troops from Iraq created a power vacuum in the region that was massively exacerbated by the US inspired Arab spring.

Paradoxically, Obama’s idealism prompted oppressive governments such as Egypt and Saudi Arabia to greatly increase purchases of US military equipment. Needless to say, the US was happy to oblige them behind the backs of democratic activists who had so gullibly listened to Obama.

Prospective Cure for the Crisis

Now there is an influx of refugees moving into Europe on an unprecedented scale. Additionally, horrific terrorist attacks have been escalating in Europe and worldwide.

The cure for global extremism is not to build a wall between developed economies and the rest of the world. Neither will a senseless debt funded US military expansion solve the problem.

There is only one feasible way to defeat global extremism. Profligate middle class consumers in developed economies must live within their means and keep their personal debts off the government books. There is no other way.

Please Use Sustainable Travel

Western consumers love to use their credit cards, mortgage debt and student loans to fund extravagant travel in developing countries. Ironically, the same countries that were most devastated by the 2008 financial crisis.

However, debt funded global travel is not the cure for global poverty and extremism. Indeed, the continued self indulgence of careless western consumers is not the solution to any problem – it is the problem.

Simply put, sustainable global travel is based on the concept of living within your means. So if you cannot support yourself 100% while inside your country of origin, why would you aspire to travel outside of it? Additionally, who is going to end up paying for it?

Surely there are plenty of affordable vacation spots in your home country. Unfortunately, that’s still not how it works.