You all must have heard mentions of a ‘financial crisis, ‘recession’, and ‘market crashes’ all over the past few months. We are well aware that the Covid 19 pandemic has hurt the economy. We are progressing steadily towards a financial crisis unless we are already there. In this video, we will talk about what a financial crisis means, get a beginner’s view of the situation, and see how it affects us personally.

What happens in a financial crisis?

Financial crises are not a new phenomenon. They can be traced from the crisis in Ancient Greece to the Great Depression to the 2008 global economic recession. At its most basic, a financial crisis occurs when there’s a drop in the value of assets and financial institutions. This can often be accompanied by stock market crashes, bank runs, or real estate crises.

Let’s visualize what happened during crises in the past.

Dutch Tulip Mania

The Dutch Tulip Mania can be considered a historical event – a huge market bubble, certainly famous. A market bubble is a time when there is a sharp increase in the prices of assets or other products. In the 1600s, tulips arrived in Europe and took it by storm. Since they were extremely exotic, a kind of flower no one had seen before, they quickly became a status symbol. People’s demands for tulips grew so much, that they would pay exorbitant amounts for it. Here’s a picture – if you were an ordinary merchant in Holland in the 1600s, a single tulip bulb would cost about six times your annual income.

DotCom Bubble

This is a bit recent. World Wide Web had just been launched. The internet was the new sensation. Everyone wanted to invest in this new venture, and many overestimated the values of these DotComs. This overvaluation led to a bubble that grew exponentially over the years. As internet stalk prices grew and companies failed to grow as much they had been expected to, negative implications were bound to occur. The bubble burst. Many companies had to face liquidation. There is a reason you haven’t heard names like Webvan, Boo.com, or 360Networks. Some companies did survive – and these are tech giants today – Amazon, Microsoft, and eBay. But there was a massive market crash which led to layoffs in the tech sector.

Mortgage Crisis in 2008

After the DotCom Bubble, investors were keen to grow their earnings. Since the bubble had caused immense losses, people were ready to make risky investments to maximize profits. This led to a huge mess. Lenders gave mortgage loans to people with no assets, bad credit, and often negligible income. Imagine this – your friend Sam with a bad credit score, is always between jobs, applies for a mortgage loan. He gets approved. Naturally, at some point, he would not be able to pay it back. So, he would resort to defaulting, and investors would lose tons of money. This is exactly what happened. And then, a ripple effect pushed the world into a great recession. There was a drop in world trade. Government debts increased. This affected UK, massively. It had the lowest recovery rate and extremely low productivity growth.

What happens to the people?

Assuming you now have a basic understanding of what a financial crisis is and what conditions might cause it, let’s now take a look at how it might affect common people like you and me. We got to know that during previous financial crises, banks shut down, companies declared bankruptcy, and investors lost a lot of money – which resulted in a very small number of new businesses opening up. This is a very direct, and very easy to comprehend impact – unemployment. Indeed, in a financial crisis, there will be layoffs, there will be salary reductions, and as companies shut down – people will lose jobs. It also becomes hard to get a job, more so, if you are a fresher. For example, in Ireland, around 6 million students graduated in 2007. In 2008, 1.5 million were unemployed. If you’ve just graduated college, you probably won’t get a job. You might choose to go to grad school, then, hoping another degree would ensure work. But that would not be a complete guarantee either.

The worst-hit are generally the poor, low-income families. They suffer from redundancies and credit card debt. As jobs and salaries reduce, people also have to struggle with inflation. After 2008, a lot of people fell into debt traps. A huge part of these were people from marginalized communities – racial and sexual minorities, and women.

Now, here’s a thing that’s going to enrage you – while the poor struggle and get poorer and poorer, the rich – they keep getting richer. Let’s go back to the mortgage crisis again. After the crisis, the collective wealth of the world’s rich rose 19%. The rich persevered because they previously held assets – mostly a lot of real estates, which they brought into utility now. As common people struggled for years, the richer regained all lost wealth within the short span of a single year.

The mortgage crisis took place majorly in the US but affected all economies of the world severely. It is important to note that in the globalized world, we are all connected, especially by the flow of capital and commodities. This is what led to a global recession – people all over the world lost jobs and were hit hard by the economy going down. Any financial crisis of any kind, anywhere, is bound to affect other economic systems as well, by sheer virtue of global interconnectedness.

How to Capitalize in a Financial Crisis?

It’s always good to make the best out of the worst situations. A financial crisis proves to be a painful time, but there are ways to capitalize on the situation and make some money of your own. Here are some tips you might find useful.

Investments

Invest. Look for people who can advise you, or spend some money on technology-based advisers like Wealthfront. By investing smartly, you can multiple your savings easily. Here’s an idea – stock markets will decline, so you can go on and buy heavily discounted ones, then sell them later on when prices rise.

Buy Gold and Silver

You might be wary of buying stocks or bonds during a time like this. More so, if you’ve never bought one. There’s a simpler alternative. Buy precious metals like gold and silver. Gold is an easy option. But, only do this at the beginning of a crisis, or when you know one is impending. Prices of gold skyrocket during a financial crisis. So, you can later sell it and gain a lot more than you spent on it. If not gold, silver is a good, safe option. However, be sure to research carefully and make sure you’re spending on real metal.

Get a Passive Income Strategy

Passive incomes are regular earnings from places other than employment. A great way is to invest in real estate. Rent or lease out properties, or sell them. If you don’t have such properties now, this is a great time to buy. You can also try renting out your yard as an event space for small parties, or even photoshoots. You can also try simpler things like blogging, freelancing, peer-to-peer lending, or selling small handmade things.

Sell Unnecessary Items

It might be a good idea to sell old items lying around your house. Your mom’s vintage clothes, jewelry you don’t care for, electronics, pop culture items, and furniture. Many people have now made it a business to thrift old clothes. This is both environmentally sustainable and a good side income.

Expand your Business

A financial crisis will be a time when interest rates will be down. This is a great time to expand your business. Take loans and invest them in something fruitful. Make sure whatever you spend on is making you money in the long run, or at the least increasing your savings. Take the jump and leap.

Build Liquidity

This is the most important piece of advice I have for you. Make money on the buy. I’ll give you a quick example. Here’s what my friend Rebecca did in 2008. She bought a small, cash-strapped business from a couple looking to sell. Later, she sold it to someone else for a much higher price and gained a huge profit. You need to be smart enough. It is your money.

It is difficult to overcome a financial crisis. Especially when you are looking at your friends losing jobs and their businesses failing. However, history has shown that many emerge victorious out of such times of distress. This is the only thing you should focus on. Make smart choices that will help you gain more than you lose. Seek opportunities. Don’t flee from taking risks.