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Financial Crisis – Dynamics and Causes

The financial crisis is something which the world has now become used to. The most recent financial crisis happened 4 years back in 2008 when a lot of big financial institutions went under the rubble and the whole world was devastated to the extent of losing major investments and personal savings.

financial crisis
financial crisis

The effect was so bad that even today a major part of the world is suffering from its after-effects. Below are the dynamics and causes of the financial crisis;

What happens before the crisis?

  • The economy starts to decline bit by bit after a good period of growth
  • The stock market is trading on a high at one moment and treading on the path of ruining the other
  • Even the real estate sector cannot remain untouched by this downturn and the real estate prices start declining
  • The overall debt in the market increases and suddenly begins on a very high level

The beginning of the crisis

The initial stages of the crisis begin to show through when people & governments take necessary steps to tide over the crisis so that things can improve.

 The processes which follow this stage are:

  • A lot of big companies start realizing that their investments are not paying up as per their expectations. This realization leads to lowering of investments.
  • A similar realization hits the individual investors and they also cut down on their consumption while sticking only to necessities.
  • The demand for products and services steadily decreases, in turn, hitting the profit margin & revenue of the firms.
  • The above factors negatively affect the incomes and revenues of companies & individuals.
  • Stock market starts declining and so do the stock prices. This has a direct effect on the net worth of individuals & firms.
  • Real estate suffers and the price of real estate decreases.

The process leading to a full-blown crisis

After a certain point, a stage comes when the crisis reaches its threshold and is spiraling out of control. The various stages of this full-blown crisis are:

  • Buying & selling activities of organizations including their revenue start heading northwards
  • Increase in the number of people and companies who declare themselves as bankrupt and people keep falling into the debt trap
  • Increase in the level of unemployment when even the employed being laid off
  • Banks & other financial institutions are forced to increase the rates so as to maintain their revenue position. This increase in interest rates further squeezes the organizations & individuals who are already reeling under huge losses and fear of bankruptcy.
  • Leads to a massive sale of properties and real estate at much lower prices because the organizations and individuals are trying to get rid of the debt.

The final stage or the end

The crisis ends only after all the losses are made good by selling off the assets and properties belonging to individuals & organizations who owe money. Those who cannot are declared bankrupt and their debts are nullified. The society is rebuilt on the leftovers.

Economic Crisis Leads to Rising in Homelessness

Over the last few years, the cost of living has jumped at a frightening rate and this jump has seen a rise in the number of people recorded homeless by the government.

According to the analysis done by over 500 charities the number of households deemed homeless by councils across England has rocketed by 13% to 35,680 in just the first 9 months of 2011, when compared to the same time period last year.

That is a frightening amount of households, so not just one man, but families, couples, and so on. The government is not only seeing a rise in homelessness but it also using B&Bs to house them. The use of this kind of accommodation has risen by 30% this year.

So what is causing all this?

I have mentioned the rise in living expenses but charities say it is also down to the poor economic climate and the slow, but steady, removal of benefits – all this at a time of rising rent prices too!

What is most alarming is the number of people finding themselves homeless after being forced to leave their privately rented homes due to increases in monthly fees. Charities are concerned this trend will continue and in fact grow as the government continues to make changes to housing benefit.

In my opinion, becoming homeless shouldn’t be a default result of losing your job, can’t afford to pay your rent or hit other financial difficulties. We need to see action urgently to make sure people can stay in their homes.

The Labour party has voiced their opinion stating that at least a quarter of people are concerned about losing their homes or being forced to move due to the current economic situation.

Labor shadow Housing Minister Jack Dromey says that the coalition governments’ housing policies are out of touch with what is happening to real people in the street.

He encourages everyone who feels alone in their struggle or is facing financial difficulty to get in touch with their local councils. All local councils have a legal responsibility to make sure all eligible homeless households are not ‘roofless’ – and they can also give plenty of free advice and guidance.

It seems it is more important than ever to take a keen interest in your finances and maybe even do a kind deed for your neighbor, a little thing that can relieve some financial pressure!

Rebuilding Construction Industry After Financial Crisis

Whilst it may not have been a good time for construction companies during the economic crisis and recession, as things begin to pick up you might be thinking of starting up your very own small business to take the increasing work available in the construction sector.

construction industry
construction industry

Many businesses went under when things were tough, meaning there will be a need for new companies sometime in the future, so a small business that takes on little jobs right now might be able to develop into something much larger in years to come.

If you are indeed thinking along these lines then you may be looking for tips and advice on just how you would go about starting up a small construction company. Below is information, tips, and advice on what you should consider when starting up your own construction business.

First of all, construction is an industry that will always be needed as they are a necessity for those clients who need new structures to be built or current ones to be repaired or renovated. However, despite the troubles the economy has seen over the years, this industry is still highly competitive, so unless you are up to the fight it might not be for you.

If you do think you have what it takes however, a small business in the construction industry can bring you an excellent living.

The Structure of a Business

What you first have to consider if you are going to start up a small construction business is just what type it will be with regards to the paperwork. You need to work out whether you will you be the sole owner of the company or whether it will be a jointly owned venture between you and a few others; you could even think of setting up as a corporation that will have numerous shareholders.

You will most likely opt for one of the first two options simply because the business will be far too small to warrant a full-scale infrastructure that a corporation would entail.

Start Out Smart and Efficient

When a construction company is run badly, one of the biggest downfalls that can occur is a huge amount of waste. This waste could be anything from materials, time and of course money, so it would be a good idea to implement strong awareness levels regarding efficiency at the earliest possible time.

When a company is run efficiently it works so much smoother; in fact, a good way to sum it up would be to say that working smarter is far more effective than working harder. Start with making sure your warehouse is well-organized and large enough so that you always have enough space to buy large amounts of materials to take advantage of the benefits and savings that you can get on bulk orders.

Make sure that none of your materials are wasted in the field and you will be amazed at how much money you will be saving.

Publicity and Advertising

Advertising your company has to be one of the most important initial things that you do, especially in the beginning until you have a list of contacts. You should not underestimate the power of word of mouth; if you do a good job every time then you are likely to get repeat orders as the quality of your work creates its very own advertising.

Start small with advertisements in the Yellow Pages and some of the local newspapers around town and perhaps drop some advertisements in both hardware shops and building supplies shops. Then you could have your company vans and trucks painted with your company details on them before they are finished off with their industrial coatings.

Workforce

This will obviously grow as you expand but in the beginning, it could just be you and a few other workers. When you do expand you will find that it can sometimes be a bit difficult finding employees that not only have the required qualifications but also the right personality to help your business grow.

Check out any applicants vigorously and always phone previous employers to ask what kind of worker they are capable of.

A Mortgage Crisis Primer for the Financially Illiterate

The housing bubble in 2008 and the ongoing financial crisis have proved to have disastrous effects on the economy. Understanding the process that led to the crisis can be challenging even for the financially literate.

Structured finance played a significant role in the evolution of this crisis, and although structured finance is a normal part of the business world, its misuse proved to have disastrous results for large segments of the population.

Structured Finance

Structured finance is essentially creative financial engineering. For the average person, lending is done through a bank. The bank looks at your ability to repay the loan and makes a determination. This then is added to your liability and your credit.

With added debt, your borrowing risk is higher because you have a higher debt to income ration, and you can only repay the debt or default. In structured finance, the loan is tied to assets that they can be sold. These assets do not negatively affect risk.

The process is a lot more convoluted than that, but in a nutshell, structured finance is meant to increase the flow of debt to allow companies to raise more capital. This debt can be in the form of auto loans and home mortgages. They can bundle this debt into packages called securities.

How does structured finance relate to the housing crisis? The process essentially begins with legislation. In 1977, Congress passed the Community Reinvestment Act to make it easier for poor people to qualify for mortgages.

A long series of amendments and provisions to the bill removed the checks and balances that were put in place to ensure lenders did not write bad loans.

By 2002, the Department of Housing and Urban Development required a certain agency to provide half its revenues to support affordable housing, which amounted to billions of dollars backing up bad loans.

Remove Bad Loans From Balance Sheets

Bankers needed to find creative ways to remove all those bad loans from their balance sheets, and this is where structured finance comes into play. All of those bad loans were packaged and then sold to other interested parties all around the world.

Interestingly, the German government owns some American mortgage debt. Banks were able to do this with the assistance of large rating agencies, that, among other things, rate the credit of countries. It was the rating agencies who told the banks how they needed to structure their mortgage-backed securities.

This is all of those default mortgages, remember? They did this in a way that allowed the agencies to rate those securities as investments even though they were packages of bad loans. This process can be looked at as very creative, or very infectious, but either way, it caused the spread of the harm of those bad loans.

There are other issues related to removing credit default swaps from the regulation process, and the process is certainly more convoluted than that. Structured finance is not inherently evil, and is a great tool for companies to manage their capital. But in the case of the financial crisis, evil was certainly afoot.

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