Week 5: The Big Short, 2008 financial crisis



The Big Short: 2008 Financial Crisis



During the time of 2016 a movie was released called "The Big Short". The movie is basically explaining how the 2008 financial crisis in the United States actually happens and the result after the financial crisis occurred. Basically the movie explains about the economy crisis that is happened during the year 2008, it's cause by over investment on the collateral debt obligations and poor family issuing mortgage that they can't pay. In the end of the movie, tons of low income people are not able to pay which leads to the load becoming default, which results to the bank confiscating the houses they lived in. Although the houses have been confiscated, the banks are not able to sell the houses since no one will buy them which leads to depreciation in the future. The leads to banks on debt to themselves as investors have invested 1 billion dollars on credit default swap. as the Bank can't pay the investors this leads to financial crisis that happened during the year 2008.

In my opinion, the one who is to blame on the happening on cause of 2008 financial crisis is the families that decided to issue to mortgage and the banks. In terms of the family, it's their fault due to them actually agreeing to issuing a mortgage even though they don't have the money to actually repay the loans. For the banks, it's the bank faults that the bank change the financial report by changing triple C bonds to Triple B bonds in the report. This causes fraud to the investors investing 1 billion dollars on credit default swap, there's no way the investors would invest if all the bonds being issued are triple C bonds instead of triple B bonds.

 As once i decided to invest in Bitcoin during the year 2017, all my friends are investing in bitcoin during those year as the price kept increasing and they told me that it's a good market to actually invest our moneys in. As i myself was also interested in earning more monthly salary so i decided to invest around £200 at bitcoin. At first it was all good i gained a profit of £50, but as time goes by my friends told me to convert all my bitcoin to cash again as it was predicted that Bitcoin price will fall drastically, being greedy of myself i decided to still keep it and expecting more profit in the future. Little do i know that my Bitcoin's worth only £125 left instead of £250, i decided to immediately cash out the Bitcoin with a result of loss of £75 in the end.

As this week topic relates to cost of capital, using the Capital Asset Pricing Model and Weighted Average Cost Capital in seeing the potential income for the Bitcoin that I've invested in the past is not necessarily to be accurate, As it is hard to measure the income and the risk of investing in the Bitcoin market, since those methods are only to calculate the income and risk that is happening now, but we can't really tell on what is going to happen in the future to the market. Imagine if the methods shows that i will be having a surplus in profits in the next 6 months but suddenly a financial crisis happen, the price of the bitcoin that i have invested will go down drastically. So this is why i said that those 2 methods are not accurate to calculate the potential risk and profits.

As someone that are willing to invest in a certain market, it is best to see if we are willing to accept the fate if we lose it all, and for people who wants to issue loans and mortgages it is best for them to know and see their financial status in if they can pay for the loans or not, if they still hesitate or isn't confident 100% in actually being able to pay those loans, then they should never really issue the loan.

To conclude everything above, i have learned from the movie that the not being financial stable will also affect the economy. As the movie shows that when there's a lot of defaults on the bonds, the banks wanted to sell the asset being retained but no one has the purchasing power to purchase it as they themselves are not financial stable. This leads to the whole economy getting into a deep recession.

Although the 2008 Financial Crisis was voted to be the biggest financial crisis that has ever happen. The question is that will there be another financial crisis similar to the 2008 financial crisis?


References:

-The Big Short Movie

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