An annus horribilis
As 2009 gets underway, we look back at a year to forget for many, and ask just how did 2008 go so horribly wrong?
It was a year to forget for most, but for a few it was an opportunity to capitalise on the misfortune and mistakes of others.
Things started badly for the UK in February with the nationalisation of Northern Rock.
The first run on a bank in living memory saw savers queuing outside branches intent on withdrawing their savings. The credit crunch had truly arrived when banks stopped lending to each other and the credit they relied on for financing all but disappeared.
Northern Rock avoided collapse after The Bank of England loans and a guarantee on savings by the British Treasury restored savers confidence. Queues subsided as it became clear Northern Rock was one of the few High Street banks that was truly safe. As the Government’s action could not prevent nationalisation.
On the other side of the Atlantic problems were worsening. Bear Stearns, the largest global investment bank, was directly undermined by bad debt related to the subprime mortgage crisis.
The Federal Reserve provided an emergency loan in March 2008, but that too was not enough. The company was sold to JPMorgan Chase for a fraction of its former worth.
World leaders remained upbeat, with most downplaying any talk of a recession in the Spring of 2008, although fears were growing about inflation.
Food and fuel prices soared as concerns grew about the ability of families to afford basic essentials. Crude oil futures reached $100 US per barrel in New York for the first time. Prices continued to increase to rise hitting new high of $147.27 per barrel on July 11.
But as the world economy slowed so to did the demand for goods, and in particular, oil. A fall in demand saw oil values drop significantly, with prices falling to a five year low on December 19; $33.87 per barrel.
By the end of the summer of 2008, there was little doubt about the scale of the problem. It became apparent that the financial meltdown and deflation were all too real concerns.
On September 15, what a year ago had seemed unthinkable, happened. America’s fourth largest investment bank, Lehman Brothers, filed for bankruptcy due to toxic debts it had accrued from the subprime crisis.
The Dow Jones fell more than 500 points on September 15, 2008, at the time the largest drop in a single day since the aftermath of September 11, 2001.
By October UK Prime Minister Gordon Brown had announced a unprecedented £250 billion bail out plan for the British economy, action that won him short term plaudits both at home and abroad.
The UK took stakes in some of Britain's biggest banks to avoid a financial collapse of the entire system, a strategy that was used too in other countries around the world including Europe and America.
For 2009 two factors loom ominously: job losses and deflation.
But if conventional wisdom favors cut backs, many may be setting themselves up to miss opportunities to invest wisely. Caution is wise, total reduction of expenditure is not. Brown's recently announced New Deal revision sets the tone for public spending and may curb recession. Remember, nothing lasts forever, not even the bad times.
