I know the title is a bit of a click bait but it is kind of true. This one supposed to be the one that sparked off the crypto race that resulted in Bitcoin and Ethereum and whatever other alternate currencies out there. And it actually make sense if you ask me. What else would make regular joe like us come out of our comfort zone and start thinking of what is truly happening in the world. Crisis. Financial Crisis. This is what supposedly made Satoshi Nakamoto (or whatever group that is behind this) to create Bitcoin. Of course whether this is completely true or not, no one can say for sure. We only have bits and pieces of emails and code but apparently Satoshi disappeared from the scene.
So what was the 2007/2008 financial crisis all about? And what impact it had on the people throughout the world. This crisis affected nearly every country and Singapore was one of the hardest hit. I mean it is supposed to be a financial powerhouse, so of course it will be hit hard. For me, I got off relatively unscathed as I was young and did not have too much of a financial burden. However for older folks and those who a lot of commitments, there will be probably worse off than me. Singapore was the first country to fall into recession and it was considered Singapore’s worst ever recession. So yes a lot of people were affected. The jobless numbers were record high. I remembered the Singapore government had to pump in considerable amount of money to help the economy and the workers.
So how did this crisis actually start? From the US. Looks like it started way before 2007 and was caused by cheap mortgage loans for housing. And thus people in the US started buying up houses using these low interest rates. However these loans were also extended to those with low or bad ratings (also called predatory lending) which of course spell trouble for the entire market. If you sell a house to someone knowing very well that they cannot afford it, in the end someone else will have to pay for it. So what did the banks do? They repackage these loans and sold to other banks to repackage them into some sort of “low-risk” securities and derivatives to sell to investors. These are somehow considered “low-risk” because they are mortgages (the collateral being the properties). As the number of sales of houses increased and with many of them in the subprime range, you can then see why it had to finally burst.
And so what happened to those who bought houses and were servicing loans? As the financial crisis continues, the interest rate increases. There is nothing much to it. Someone must pay for those unserviceable loans by the banks. And it is kind of ironic that those who suffered are those who are actually able to pay if the interest rate remained the same. But as the rates raise and the value of their house drops (as people start selling their houses they cannot afford), a lot are not able to continue to service their homes. And what happens if you cannot pay your mortgage loans? Of course the worse off would be those who should not have been given loans in the first place (those subprime borrowers). The price of their house is much lower now compared when they bought it. Plus they have to pay the loans. So the problem got bigger and bigger. And thus the lenders and banks collapse. And if you look at the number of big banks and financial institutions that collapse, you will know the world economy is being crashed by all sides. Everyone have liquidity problems. In September 2008, the inevitable happened. Markets were in a free fall and the US government had to step in, which involve the government pumping money back in to the banks and institutions. So we should kind of understand why the people are very suspicious of banks and financial institutions. On one hand, they just destroyed the economy and put a good number of people out of their homes. On the other, the government is giving them money for it. It is no wonder people are starting to look at alternatives to our traditional banks.
With that happening and without a doubt the entire world is affected. Most banks and financial institutions are international or at least will have some exposure overseas, especially since we are talking about the US. If a major player has a credit crunch, it will affect everyone else. The pressure on the world economy will be tremendous. The “great recession” that followed was one of the worst in history. Too bad I was in it as well. It is good that we are starting to see plenty of Defi options available in the cryptosphere. However as you should know by now, banks are also starting to fight back. We are hearing a lot of talk on regulations and various forms of control. Not that all forms of regulations are bad. But if it is instigated by traditional banks and financial institutions, we know they are not going off without a fight. And they don’t play fair.