The 2008 financial crisis remains one of the most important events of our times, as well as one of the most far-reaching. It’s not the only one, as the last twenty years or so have been littered with important and consequential events for the whole world, such as the 9/11 attacks – and the following War on Terror – and the rather rapid rise of the Internet. None of them, however, continue to have a bigger effect on geo-politics and the world economy than what was easily the biggest global financial crisis since the Great Depression.
The real details of the crash, however, are still hidden behind undecipherable financial jargon most people don’t understand. For most of us, it started with the bankruptcy filing of Lehman Brothers, and it all just cascaded down from there. That’s despite the fact that there had been quite a few crashes of ‘too big to fail’ entities before, too (like Enron). There was also something about low income, ‘sub-prime’ loans and irresponsible derivatives trading somewhere in there, though exactly what these things mean is beyond the understanding of even the best laymeen among us.
That’s because much like every other professional field, finance is also painfully easy to understand once you take the complicated terms out of the picture. If you break it down to its basics, the story of the 2008 financial crisis is that of political and corporate greed, the absolutely sorry state of our regulatory agencies during the build-up to the crash, and the massive, irreversible consequences for other parts of the world that had little to nothing to do with the whole thing. More worryingly, many of the factors that led to the crisis still exist, and are actually more amplified and threatening to the world economy than they have ever been. Of course, if only we knew what they are.
In an effort to understand what is arguably the most crucial (and intentionally-complicated) financial event of our times, here are a few relatively-unknown and fascinating facts about the 2008 financial crash.
The Derivatives Market Is Ten Times The Entire Global GDP
Throughout the coverage of the crisis, for those who may remember, the term ‘derivatives’ was quite prevalent, even if most of us still don’t quite know what they are. Derivatives are essentially financial instruments that gain or lose money based on the performance of their underlying entity (like gold) without the buyer or seller ever actually holding it. If that sounds like a bet to you, it absolutely is, though derivatives in themselves aren’t problematic. They encourage the flow of money as well as keep the economy engaged. The problem is when deregulation allows for derivatives to be traded on things like mortgages and investor funds, which is exactly what happened in the 2008 crash. The excessive derivatives trading on low-income mortgages – which artificially created value where there was none, as these loans were the least likely to be paid back – was what crashed the market then.
The concerning part? Derivatives trading is at an all time high today, and a lot of is suspected to be based on non-performing assets, similar to the housing bubble that led to the 2008 crash. By some estimates, the derivatives market of today may be as big as $1.2 quadrillion, which is about ten times the global GDP. Now, that doesn’t mean that $1.2 quadrillion of actual dollars are actually in the derivatives market right now, as it’s really only the sum total of all the bets floating around. That difference, however, doesn’t mean much when things go south, as the 2008 crash well proved.
Today’s derivatives are also a lot more diversified; you can even make an entirely new one if you want, as long as the buyer agrees. From interest rates and foreign currency to mortgages and even weather patterns, you could buy and sell derivatives on pretty much anything.
The Clinton Connection
The political blame for the crisis has been difficult to ascertain, though that may just be because of so many other politically-relevant things going on at the time (like the upcoming presidential elections, or the then-ongoing Afghanistan and Iraq war). Of course, the Bush administration was still widely criticized for allowing the bad financial practices to continue, and probably rightly so, too, though the stage was set much earlier than that.
Many of the deregulation policies that directly gave way to the housing crisis and the eventual 2008 crash were actually established during the Clinton era. Take the Glass-Stegall legislation, a Depression-era act separating commercial banking from investor funds, as exposing investments to market risk was what had caused the 1929 crash, too. It was repealed and replaced by the Gramm-Leach-Bliley Act of 1999, which allowed commercial banks to deal in securities. It was also the same administration that exempted credit default swaps – the complicated financial instruments whose collapse actually triggered the crash – from regulation with its Commodity Futures Modernization Act.
The Big Banks Are Now Bigger Than Ever Before
One oft-cited – and accurate – reason behind the sheer magnanimity of the fallout of the crash is the ‘too big to fail’ nature of some of the financial entities of the time. The operations of Lehman Brothers – and to some extent other similar players, like AIG – were so extensively entertwined in the entire global economy that as soon as they fell, everything else came tumbling down, too, regardless of whether it was directly related to any of those companies or not.
If that seems like a thing of the past, it’s really not, as the big banks of today are still too big to fail. Actually, they’re even bigger, as banking is a much more consolidated industry now than it was ever before. Quite a few biggies of the industry – like Bank of America and Citigroup – are still too important to let fail if a 2008-like situation ever occurs again, which should worry all of us.
Lehman Brothers Still Exists
While opinions differ on the underlying issues that triggered the crisis – whether it was the irreconcilable difference between the flatlined wages of the middle class and the soaring stock markets of the time, or the massive deregulation policies of previous governments that essentially gave traders a free hand to do anything – on the surface, the actual flash point of the whole thing was quite clearly visible. The filing of bankruptcy by Lehman Brothers – the poster child of the Wall Street ‘hustle’ culture and one of the biggest financial firms in the world, till exactly that point – was really what made everyone realize that this wasn’t just a minor correction in the housing market, but something far bigger. That was really what made investors lose all trust in the market and run to withdraw their investments, and… well, you know the details.
What’s surprising, though, is that Lehman Brothers was never really fully dismantled after the crash. A big chunk of the non-performing part of the company was handed over to Barclays, though its holding company remained as it is to settle the thousands of claims against it from all sorts of investors. While most of those claims have been settled and the money returned to the investors by now, there are a few still awaiting resolution, like the 350 former employees who had invested their paychecks into a deferred retirement plan back in the ’80s.
A Decade Of Unrest
The lasting effects of the 2008 crisis are so profound that it’s almost impossible to exaggerate them. Markets around the world lost a massive chunk of their wealth overnight, plunging the global economy into a recession that it still hasn’t fully recovered from.
More importantly, the 2008 crisis is also – in some way – responsible for the social and political unrest seen around the world since then, and it’s not just us saying it, either. Moody’s – one of the biggest credit rating agencies in the US – had stated shortly after the crash that it would require a lot of tough measures to fix it, measures that may ‘threaten social cohesion‘ in places like the US, UK and France. That’s exactly what happened, too, as the last decade has seen a spate of protests and revolts in many more countries than they anticipated, as well as a worrying resurgence in radical politics of the Nazi kind across the world. While it would be unfair to put the blame of all of that on the crisis, it certainly helped create fertile grounds for many of the biggest events of the last ten years or so.
It Still Impacts American Politics
There’s no doubt that the financial crash was a major event for the whole world, though its most acute effects could actually be seen on American politics. Regardless of which political side you may be on, you’d have noticed that every election since the crisis has been fought on an anti-establishment, ‘clean out Wall Street‘ sort of a platform. That’s a direct result of the 2008 crash, as everyone could see that corporate and financial greed had brought the country to the brink of ruin and wiped out entire chunks of people’s savings in a flash.
Europe has seen a similar rise in the popularity of anti-establishment political ideologies in this time, though it was still far from being the ground zero of the crisis. The USA, on the other hand, would probably deal with its consequences for a much longer time to come.
The Human Cost
The Internet and newspapers are full of information on the political and financial effects of the crash, much like the rest of this article. Even if most of us may not understand it in precise financial terms, we get that it took an unprecedented toll on the market as well as geopolitics.
One side of the fallout of the crash that often gets missed in those informative articles and videos, however, is the human cost of it all. By some estimates, every American lost around $70,000 of their lifetime income in the following recession. Of course, that doesn’t include the money they have already lost on all the higher-priced debt since the crash, as well as the taxpayer money used to bail the bad actors out. According to one study, the US, Canada and Europe registered over 10,000 suicides related to the crisis. And they’re just the numbers we have access to. The crisis indirectly decimated entire industries in third world countries that relied on the West for their already-meagre incomes, as well as plunged many countries into a never-ending cycle of constant conflict and starvation. These may be costs that may never be accurately quantified, though remain existent as everyday, inseparable parts of real lives around the world
As we stare into the barrel of yet another major financial crisis – possibly even bigger than the one in 2008 – we’d do well to remember the first line of defense that falls in times like these: everyday people who had nothing to do with causing any of it.