The 2008 crash – something I often mention, but haven’t really delved that deeply into. Over the last two weeks I’ve I explored some of the main causes: the housing bubble, subprime mortgages, and the fall of the Lehman Brothers, which triggered the broader global financial crisis, as well as looking at the fallout of Lehman’s collapse and ripple effects that unleashed chaos in markets around the world.
In this final part I’m going to explore the wider affects around the globe, and share my own story, as well as looking at the lessons we’ve learned since.
The ripple effects of the both the financial collapse and the house market implosion reverberated throughout the economy, leading to a massive downturn.
Businesses faced a sharp decline and companies resorted to reducing their workforce, leading to a surge in unemployment. Job losses were widespread across various sectors, including finance, manufacturing, construction, and retail. The unemployment rate reached alarming levels in many countries, exacerbating the economic downturn.
Businesses of all sizes were affected, but small businesses in particular were hit hard, as they had limited resources to weather the storm. Many businesses were forced to close their doors, file for bankruptcy, or undergo significant restructuring to survive the slump.
This rise in unemployment and business failures had awful consequences for household finances too: many individuals and families faced financial hardship, struggling to meet their mortgage payments, pay bills, and or even cover basic living expenses. This disruption of household stability contributed to the downward spiral in consumer spending: individuals became more cautious with their finances, cutting back on discretionary spending. This reduction in consumer spending led to businesses, making further layoffs and prolonging the negative spiral.
This severe economic downturn resulted in sluggish growth in the years following the crisis. Governments and central banks implemented various stimulus measures, but the healing process was protracted, with economies taking time to regain their pre-crisis momentum.
The collapse of the housing market had enduring effects, with a slow recovery in the real estate sector. Lingering effects included a surplus of unsold homes, limited access to mortgage credit, and hesitant homebuyers. These challenges affected construction and related industries, contributing to the prolonged economic impact and slower overall recovery.
I’ll admit it, back in the 00s, I thought that i was a genius who had figured out the secret formula to becoming a multi-millionaire. Everything was working really well for me, and then around about 2006, I added a load of extra staff people to my team and was planning on scaling up my whole operation quite significantly.
When I started to hearing about the subprime mortgage crisis in the US, I didn’t like the sound of it, but most people didn’t seem to have the same opinion, thinking that it was on the other side of the Atlantic and wouldn’t impact us.
At the time I had a huge number of projects in the middle of development: some were a hole in the ground, others had contractors pouring concrete. And it’s not like you can’t just turn off a project straight away! You have to finish out the project before you can sell it.
I had multiple projects at stages but was convinced that, having made a tidy profit on a previous deal and with several in the pipe, that if there was a downturn I had a ‘war chest’ of funds that would put me in a good position. But, one by one, each of my buyers began to pull out and I realised that my financial buffers were disappearing.
Then Lehman Brothers happened.
I was in the middle a multi-million project in the south of Spain and had multiple tenants who’d agreed to enter into a deal: within a couple of days of the Lehman collapse, they all started to pull out.
Suddenly I found myself dealing with fires multiple fires in different countries: people pulling out of deals, projects starting to dry up, banks starting to turn off the faucet in terms of cash flow. Everyone started to panic about this shock to the system and the fact that Lehman going down could bring down all the other banks.
When the impact started to flow through from the US to the Irish market, it was painful. I was firefighting every single day for another three or four years: at the worst point I had to prepare a statement of my financial affairs for a bank meeting. I prepared this statement and can remember just scratching my head wondering if I’d done something wrong.
I kept on running the numbers and it kept coming up with negative 16 million. That was my net worth – the values had collapsed to such an extent that I was actually 16 million in in debt, whereas before I’d previously had an incredibly healthy portfolio.
Slowly but surely I started to realise that I was in deep deep trouble and then it just became a fight for survival. In the end it took the best part of six years to get myself back on an even keel.
The 2008 crisis was a stark reminder of the devastating consequences of financial instability. So what lessons did we learn?
Regulation: robust and effective financial regulation is essential for safeguarding the stability of the financial system. The crisis emphasised the need for continuous monitoring, enhanced oversight, and stricter regulation of financial institutions.
Transparency: greater transparency and improved risk disclosure have become vital in maintaining market integrity and allowing market participants to make informed decisions. Regulators should encourage financial institutions to provide clear, accurate, and comprehensive information about their operations, risk exposures, and financial positions.
Risk management: financial institutions adopted robust risk management practices to identify, measure, and mitigate risks effectively. The crisis really underscored the importance of rigorous risk assessment, stress testing, and scenario analysis, so institutions can ensure resilience in times of economic stress.
Interdependencies: 2008 highlighted the importance of addressing systemic risks and reducing interdependencies – since then there’s been a focus on identifying systemically important institutions, monitoring their activities, and imposing additional safeguards to mitigate risks that could destabilise the entire financial system.
Education: financial literacy and consumer protection plays a vital role in preventing future catastrophes. Individuals have learned to educate themselves about financial products and the associated risks, and more responsible financial behaviour let them make informed decisions and protect themselves from predatory practices.
I hope you’ve found this series interesting – it’s important to remember that the financial landscape is dynamic, and risks can emerge from anywhere, at any time. If you’re entering the property market for the first time, it can be a daunting experience, and to that end I’ve created the FOUNDATIONS course. It takes you through the fundamentals in simple, jargon-free language, explaining how the market functions, what you need to watch out for, and giving you the steps to help you avoid costly mistakes!