How long will the "financial crisis" last?
Category: Economy. Date published: 19/09/2008
The Length of a Recession/Downturn
With all the negative media speculation about the state of the economy it’s hard to know what is actually happening and what is just sensationalist rubbish.
The tabloids love a crisis and will then do anything to prolong a paper selling story, so they feed the fire with all sorts of speculation.
There is no doubt that the economy is currently in a downturn; but let’s break it down and really understand what has happened.
Credit Crunch
British banks invested in sub-prime mortgage products in America without correctly considering the risk. The housing market in America collapsed and the banks in this country got their fingers burnt. So the banks become risk averse and remove a lot of mortgage products they were offering.
When will Banks offer these products again? When they feel less risk-averse.
Oil Prices
As I have said in previous articles oil prices have a huge impact on so many different industries because it is a widely used product. This pushes up inflation which lowers everybody’s standard of living.
One Way Business
In boom times lots of companies open up and do really well selling one product. There is no pressure to diversify and business men think good times will last forever. XL Air obviously never expected oil prices to rise to a point where they could no longer afford to refuel their planes. Some mortgage companies based their business around products that are no longer offered by financial institutions, and those companies are closing quickly which will cause unemployment.
All of the above has led to an economic downturn in a matter of months, having a much faster impact than ever before. Why? Well one reason is that information is so freely available on the internet and through various mediums now that business’s and consumers react to news much earlier than ever before.
So if we have entered into a downturn faster than before surely it is logical that the downturn will not last as long as before because we will have more information sooner than ever to react to. This is already happening, read this interesting piece on the BBC site.
This article shows how the American Government is reacting to the “credit crunch” and how Wall Street is reacting to the actions taken by the American Government. Eventually this type of information will buoy the market and confidence will rise.
I am not saying we are out of the woods, far from it!
It is my opinion that this downturn will not last as long as any other. The 18 months predicted by most other analysts is really pessimistic. I think it will get to a low point early next year and once that has been reached we will start to rise out of it faster and stronger than ever before.
