The 2007 Financial Crisis: Prelude to a Disaster

The 2007 financial crisis is probably something that you haven’t heard of. But the reality is that it happened a year before the big one. That is right. There was a shock in 2007 that drove the global stock markets downward. At that time, a lot of people thought that this was an anomaly. In their minds, the 2007 financial crisis was simply a bump on the road. It was like in 1987 when the US stock market crashed overnight. There was a steep drop of stock prices at that time and people thought that the 2007 financial crisis was the same way. They though that it will just be a one-time thing. On the other hand, people who were paying attention probably got all the signals that they needed to exit the market come to 2008 when it brought the big one. We are talking about the bankruptcy of Lehman Bros. that triggered the global stocks sell-off that totally destroyed trillions of dollars worth of global wealth. In one day, people lost everything. In hindsight, it should not be a surprise because 2007 financial crisis was the warning shot regarding 2008. People should not have neglected it. However, that is exactly what people did. Here are some insights regarding the 2007 financial crisis.

There will always be signs

One of the most common misconceptions about the stock market is that stock crashes and stock corrections are completely unforeseeable. That they are completely unexpected and sudden. This is complete hogwash. The reality is that there are signs if you have your eyes peeled for signs, you will see it. One of the biggest signs, of course, was the 2007 financial crisis. There were warning signs that banks were having a tough time collecting on certain mortgage loans. Due to US government easy-lending policies to encourage minority home-ownerships, the market was flooded with cheap mortgage loans. Whenever this happens, there will always be a large chunk of people who will try to speculate. Because of these cheap mortgages, people were buying up to 6 houses. When they do this, the price of the remaining houses in the market will go up. This is exactly what happened. In 2007, there was a credit crash because signs were appearing that banks were a bit too loose with housing loans. The key to take away 2007 financial crisis is that there are always warning signs. Not just one or two, but several warning signs before the massive crash.

Stock market gyrations

Another key lesson people can learn from the 2007 financial crisis is that markets recover quickly. It may not be a full recovery but it is at least a massive bounce right after a dip. This is what happened in 2007. When all these news regarding bad housing loans started making the rounds, people started dumping bank stocks. This triggered a market-wide sell-off of all stocks. But guess what, it made a lot of sense to dump these stocks but it didn’t really make much sense to dump industrial ones such as the general electric. As a result, the market quickly bounced back up right after the dip. This is a key lesson that any investor, whether a veteran or a beginner, should learn. Don’t be scared when markets dip. In fact, you can make quite a bit of money during these times. The only problem is finding the capital that you can use to buy up a lot of stock when the market dips. Once it happens, you can leveraged what you have and buy up stocks that you know will have a high chance of bouncing back because of their solid earnings. This is precisely what happened with the 2007 financial crisis. Just like with any stock market dip, there are always people who get burned by the reality that stock markets crash. These people just stayed on the sidelines. Too bad for them, people who know how the game works scooped up lots of stock when the market crashed and then quickly it back when the prices shot up in a short period of time. This is a key lesson that all of us should learn. Don’t leave the market permanently just because you got burned. In fact, you can make more money as the market crashes because there are so many scared people who miss the huge bounce back up.

Housing bubble instability

Another key lesson from the 2007 financial crisis is that when government policies create an artificial situation that floods the market with cheap money, you are going to have a bubble economy. Having this kind of economy will basically set you up for a massive crash. The signs and the warnings were there. People can actually see that all this easy credit is just going to lead to disaster. Unfortunately, most people just thought that the market will continue to go up for the reason that they were making so much money. Nobody wants free food to stop. Sadly, that is what’s happening now. We are currently in a bubble economy. All these cheap money being used to buy up stocks in the United States and countries like the Philippines, Korea and Thailand, is actually “funny money”. This money became cheap because the United States deliberately destroyed its currency through quantitative easing. The US Federal reserve just started printing out trillions of dollars worth of paper. Instead of this generating jobs in the United States or generating new business. it actually got exported to weak economies like Philippines. Hence, the stock market doubled in price. This is what’s happening. We are in a sad situation where the US Federal reserve cannot reversed itself quickly. It knows full well that any abrupt stop to the easy money will cause a collapse in emerging markets like Indonesia, the Philippines, Turkey and others. This collapse can also damage Wall Street. On the other hand, the US Federal reserve also knows that it cannot continue printing “funny money” forever as it adds to the US debt. So it is between a rock and a hard plate. That’s why the 2007 financial crisis is so instructive. We already had a nice little correction where the market dropped two hundred points. That is just the beginning. Expect more signs. We are in a “bubble economy” The Dow Jones is hitting record after record and it’s all going to come to a head soon.

The 2007 financial crisis did not happen in a vacuum. It pointed the way to the great crash of 2008. It is anyone’s guess when the next great crash will be.