Effect of the financial crisis on the “rich”


I recently came across a very interesting podcast on the BBC Business Daily program .This delved into “how the rich have been changed by the aftershock of the great financial earthquake”. A highlight of the program was the interview of John McAfee (founder of McAfee anti-virus software) who saw his fortune shrink from $400,000,000 to $ 4,000,000  at the peak of the financial tumult.  The magnitude of this loss prompted a lot of soul searching on his part; an evaluation of the quest for excessive material accumulation. This eventually led him to share huge parts of his estate amongst the financially disadvantaged.

In line with the above, John opined that never ending deluge of advertisements lead to insatiable material acquisition- a major feature of capitalism. Drawing insight from the world’s poor and comparing it to the wealthy capitalists, he found it rather bizarre that whilst huge number of people experience financial poverty, a few rich; so greatly influenced by branding and image, waste resources that otherwise would have been equitably distributed to the poor.

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One Response to “Effect of the financial crisis on the “rich””

  1. diatezuam Says:

    A financial crisis typically leads to a depression or severe recession. Such a dramatic deflation of wealth has had a noticeable impact on the high net worth individuals (HNWIs) who witnessed their wealth evaporate at an alarming rate. (As John McAfee, founder of the antivirus company whose name greets many of us each day, said to the Times, “I had no clue that there would be this ………collapse.”) In these circumstances, Van der Linde told me, people take care of themselves first. As a result, the wealthy have altered their expectations of the financial firms which serve them, bringing strong demends for transparency and simplicity. Over 26 percent of HNWIs abandoned the firms that were serving them before the crisis, she would tell the assembly, with the younger and more active leaving at higher numbers.

    It is important to note that a financial crisis typically does lead to serious economic crisis. This has happened many times in the past in the United States and elsewher and has been the main cause of depressions. The overvaluing of prices on the upturn, and then the failure of financial institutions because of declining valuations, leverage by financical institutions, linkage between financial institutions, can cause everyone who has money invested, deposited or backed by these institutions to lose money, plunging the economy into depression or serious recession. See the Financial Crisis of 1873 where economic and financial over-expansion was ended, in part because of the collapse of a key financial firm, Jay Cooke and company.) We have been spared a very serious financial crisis for many years because, as the result of the great depression, sounf financial system regulatory policies were introduced. These policies and oversight have been increasingly dismantled since the Reagan presidency beginning in 1980, and set the stage for the current major financial crisis.
    The United States was the center of the financial crisis (although certainly banks and other financial institutions in other countries and their national institutions that were supposed to regulate them share some of the blame). In the United States, many (not all) banks, other financial institutions such as insurance companies especially AIG), mortgage companies, and investment bankers, made some very stupid decisions which put a lot of people at risk. The tangled web of this stupidity is too complex to unravel here, but ……a few key illustrative examples!
    Housing prices. Housing prices rose very rapidly in the 2000s. From an index value of 100 in 2000, national housing prices, as measured by the Case-Schiller index, rose to 189 in 2006. This dramatic rise, far outstripping the usual rate of increase in housing values, is why it was called a housing bubble early on by a few including Dean Baker of the center for Economic and policy Research and Nouriel Roubini, an NYU professor, and by everyone later on.
    Banks. Banks make profits from other people’s money. A bank owes a lot of money to its depositors. It takes this money and lends it out. A bank’s capital position — how much of its own money it has at risk—is about 10 percent of the money it has loaned out.
    Credit default swaps and AIG. Credit default swaps are a very arcane financial instrument, something like insurance. If I buy insurance it says I pay a price to insure something like my house, and if something happens, according to the legal document of the insurance, I get reimbursed.

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