2008 will probably be remembered as the most eventful year in the modern history of financial services; global markets experienced a once in a generation meltdown. The financial crisis started with falling real estate prices in the US and is continuing without showing any signs of abating. Some of the largest icons in the Western financial services industry have disappeared into thin air, while others are struggling to survive on government backing, which is generating more debt to buy them time. The situation is ironic.
The effects are just beginning to trickle out: major economies are in recession, huge job losses are on the way, consumer spending has stalled, real estate is tumbling, investors have lost faith in the financial system, and most importantly, the image of the US financial system as safe haven has been dented – perhaps beyond repair. We have witnessed in recent years that excessive leverage and speculative activity only creates an illusion of temporary growth and uncertainty in the economy. Debt is not wealth, and borrowed money has to be paid back at a significant mark-up; if we borrow too much we end up working for our creditors rather than ourselves.
This is the fatal problem of "running fast to stand still". Speculative activity is typically a characteristic of market peaks in any economy and if not controlled it can have adverse affects on the long-term prospects of the economy.
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