Today on googler blog I want to give you a few thoughts on the financial crisis of 2008. I believe the entire world was affected by it, yet the biggest part of the world did not really understand the causes that led to the crisis. I am absolutely convinced that we can definitely know those causes and that the crash could have been predicted and avoided. We have not created a system which we cannot control and we do not play the game that beats us. We have to see how the financial system works and what happens when there are excesses reached in the system.
In order to understand the causes we need to understand how important money for our global economy is. It is economic blood. When blood is normally circulating through human body everything is fine, but when you start experiences things like thrombus, low blood or high blood pressure and the like, your body gets into trouble. You might have a stroke or a heart attack or some other serious thing may happen.
The same is true about current economic system. When money circulates around all economic system and there is enough of it (not too much and not too little) everything is fine. However, when there is a sudden or gradual increase of money in the system, we start having an economic disease which is called inflation. It is ok when it is small and stable. However, if the amount of money in the system continues increasing, inflation continues rising and we finally have what is called a bubble. How is that bubble formed?
By means of borrowing and lending. In present system money comes through huge commercial banks, which get their money through central banks and distribute them to smaller commercial banks, which in their turn lend it to businesses and private individuals. So, when everybody is rushing to borrow and there are those (banks) who are rushing to lend, the system is flooded with money. If the process continues for a considerable period of time, inflation gets out of control. Everything is booming, salaries rising, new businesses are being created and…gradually interest rates are being raised.
This increase in interest rates is meant to cool the economy from heating, but unfortunately it is seldom applied at the right time and it seldom creates desirable results. This process starts a chain of bankruptcies because some companies and private individuals are no longer able to pay their debts. This causes banks to increase interest rates even more in order to compensate losses. Finally everybody is in trouble, because at some point banks are not willing to lend anymore as interest rates are very high. So, money stops coming to the system and that’s when bubble explodes and crisis comes. That’s what happened in 2008 right when lending and construction boom ended.
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