The Financial Crisis of 2008

The Financial Crisis of 2008 was an economic bubble that reached its limits and exploded. A bubble is simply where prices continue to rise beyond the true value. People buy, simply because they believe everybody else is going to buy. A bubble is based on speculation, expectation and ignorance. When these three elements collide it creates a crisis, which is often defined by irrational financial exuberance.

The causes of the economic crisis of 2008 are related to the Bush administration's attempt to finance the war in Iraq with, basically, inflation. The Federal Reserve cooperated by financing the Iraqi war, by essentially lending money to the American state. But printing new money out of thin air, actually devalues the national currency, this is called inflation. This cheap money went straight into the economy, particularly the residential housing market. As a consequence the demand for houses rose; and housing prices took off like a rocket in 2001. Thanks to inflation the prices further accelerated in 2004. More and more people took on mortgages based on cheap currency. The lenders then sold the mortgages as bundles to secondary investors, such as American banks. The American banks then sold their bundles to banks in other countries. This is how American debt spread around the world and became a real international financial crisis. European banks were selling and buying American mortgage as bundles. And all the while all of this was based on cheap money, with no value whatsoever behind it.

People expected housig prices to continue to rise, but the opposite happened. The steady decline began in 2005 and by 2007 the panic kicked in and house prices were crashing down. The collapse of the housing bubble dragged the secondary investors along with it. US debt had spread all around the world and the damage was truly on a global scale.

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[redcat608]

CaspianReport, house prices today are just a facade and not worth getting a loan for?

[crogsvien]

☻♥☺°¨"↓-♀

[tsns1]

Good You made this video now, when you run for office they wont let you get 'Politcally Involved'.

[Macmittens411]

This guy is a Genius!!

[justletuslive]

4:00 the picture was just hilarious

[bassiebindetent]

great video man, very helpful;) keep it up!

[Gearex2001]

Very Cool Metal Gear Solid sountrack ;)

[maximilianUTU]

part 4 (under part 3 is part 2 under part 2 part 1) Next year he has to pay interest from the taxes he collects and so takes money out of the consumption cycle and pushes it to the investment money pile! This happens now in Greece and happens since 1997 in Japan. Even the rich will suffer, because when the inflation comes (and inflation is the only way for politicians to solve the debt crisis) their money will be massively devaluated.

[maximilianUTU]

part 3 Private financial assets have grown 6-8 times while private consumption (which equals to income from labor) is more or less stable or even shrinks for the lower and the middle class. Classical economist measure inflation in rise of prices for daily goods - but these prices do not rise, because MC does not rise ! Today inflation happens in assets. The situation worsens when the state reduces taxes and finances his spendings by credit (bonds).

[maximilianUTU]

So next to the more or less unchanging real economy a mountain of investment money grows year after year. Where does it take its surplus from: from the real economy! The enormous amount of investment money strangulates the economy more than it stimulates it. In reality we have two amounts of money: let's call them MC (money that will go into consumption) and MI (money that looks for investment only). And this is exactly what we observe in the last 30 years!