The 2008 credit crisis that originated in the U.S.A. resulted in the Great Recession. Even till today, the US economy is still sluggish despite two massive stimulus package from the Federal Reserves.
So how did the credit crisis happened? Today, even if you go to Shenton Way and ask the bankers, most of them will probably not be able to explain how the sub-prime bubble burst.
Therefore, I hope to educate and enlighten my readers on the 2008 "Sub-prime Crisis" in the US.
The video below is an excellent illustration of the crisis. (The graphics and animations are fantastic! >_<)
The "Crisis of Credit" video is owned by Jonathan Jarvis.
Allow me to break down the story/ events:
1. Between 2004 and 2007, American banks started to lend money to people who do not have healthy financial status. The type of mortgages were called "Sub-Prime Mortgages" because they are "sub-standard". I am going to call these homeowners the "Cannot-make-it-homeowners". (Way to go.......greedy American banks -__- " )
2. The banks then re-package these sub-prime mortgages into investment-grade (AAA rated) instruments called "Credit Default Swaps" or CDOs. The global giant insurance company AIG went really deep into these CDOs. Millions of CDOs were sold to retail and institutional investors. (Our very own DBS and various Town Councils bought alot too.....sighz -__- " )
3. Everything was fine at first. The homeowners were paying their loans, the investors are getting their returns and the bankers earned huge salaries.
4. However, the nightmare scenario occurred. The "Cannot-make-it-homeowners" could not pay their mortgages.
The investors lost a huge amount of their fortunes and the banks (Lehman Brothers) collapsed.
5. In the end, banks stop lending money to one another and to other businesses. The global credit crisis began.
My Thoughts and Reflections:
I personally feel that the ultimate cause of all these unfortunate series of events is "Human Greed". The banks were greedy. The homeowners were greedy. The investors were greedy. The insurance companies were greedy. The ratings agencies were greedy. The lawyers were greedy. Everyone wanted a piece of the pie, and the bigger the better. In the end, everyone over-leveraged and the bubble burst.
I will always use this crisis to remind myself not to be greedy and over-leverage my investment. I have resisted the temptations of getting a credit card many times. Some of my peers even said, "How can you not have a credit card?!!!!"
Anyway, is greed really good for us? Will such a crisis happened again? Will we learn our lesson?
How do you prepare your portfolio for such crisis?
Let me know your views by posting below.