The end of the recession is here, but what did we really learn from all this craziness…

Now that the recession has ended, we go back and think of what we have always heard investment experts use the lines ” Do not put all your eggs in one basket” and we know that banks and insurance companies have used this line for decades to sign more people on to their products and services, but I guess its human nature that we just hate listening to our own wisdom and sometimes need to be reminded by others of the consequences of putting all your eggs in one basket.

Wait! Lets backtrack, did I actually say the recession is over?

YES, YES, YES…The recession has been over since July and we are now in a period of very modest recovery, the impact of the recession will still be with us till mid 2010 due to unemployment being so high, and the modest recovery level will not be an overnight fix. The reality remains that this was the second worst financial meltdown the country has ever had, right behind the great depression and the impact of it is far from over as it will now transfer itself to the foreign markets like Europe and China who are about to experience something much large than we did. We’ll come back to this in a moment.

What did we learn?

We discussed the causes of the financial meltdown being surrounded with greed from all levels. From the government to the consumers, everyone was to blame but regardless, why did most of us lose and others prospered during our economic boom. Most of us knew the bubble would burst, and most of us had back up plans and back up funds invested in many different sectors. WRONG!!!

Most of the American companies, banks, people and investors believed that the market would continue so despite knowing in the back of their minds this can’t last forever, they continued to play the game in their own way. Banks bought properties, lend bad loans and re-invested in securities. The Government issued bonds tied to real estate securities and people kept buying multiple homes with realistic loan programs that they couldn’t afford. Since all investments from all parties were within the same segment and based on the prosperity of one investment “Real Estate” then once one collapses they all collapse and the domino effect begins and so did the meltdown. This could have easily been avoided if all investment sectors didn’t get so greedy and expect the profits to be maximized, through aggressive investment strategies, but instead followed their own advice and what has worked for 500 years which is simply to diversify more and take a conservative approach. This wasn’t the first recession and won’t be the last.

Now we felt the damage this has done through the great recession, and have witnessed businesses close, banks collapse, and foreclosures in amounts we have never seen before, but all of this was nowhere near as bad as China and Europe who are about to face a tremendous meltdown, one much bigger than our financial meltdown. This one is the result of what happens when credit disappears and so do the businesses dependent on it. China and Europe are highly dependent on the foreign trade market, in fact more than 58% of their country’s economy is based on foreign trade, which means that when foreign trade goes upside down, so does the financial system of the entire country.

Take China. Its exports have fallen by about 17 percent, as have Singapore’s. Others have fared a lot worse. South Korea’s exports have plunged by 21 percent, and Taiwan’s by 36 percent. Similar figures typify the situations elsewhere in Asia and in Eastern Europe. Not surprisingly, given the export-oriented growth model of these economies, overall economic growth has also turned sharply downward.

The problem for Western European finance is that it holds most of the international loans in these sinking economies. European banks, for instance, hold some 54 percent of the $1.4 trillion of foreign bank loans residing in the Asian emerging economies. (For perspective, American banks hold only 15 percent of such debt.) Of the $1.8 trillion of foreign bank loans in Eastern Europe, more than 70 percent resides in Western European banks.

If, as expected, the American economic situation can stabilize in the later half of 2009, and China can sustain an adequate growth rate as it changes its economy toward a domestic growth engine, there is a good chance that European finance meaning global finance, will avoid the dangers implicit in these great weak areas. But still, for the time being, investors need to recognize the significant risks and be careful when investing.

In conclusion, we learned that recessions hurt and for once all generations were made aware of this at the same time. This ending recession was much needed and opened the eyes of many Generation Y folks that were living the dream of financial freedom on their debt. Those day are now over and the world is back to normal but remember that this will occur again and that you have lived through it. Let’s learn from past financial data and not reinvest all we got back in the same basket during round 2 and if you are ever tempted, simply remember the pictures in this article as the end of the recession might be here but the next recession might be right around the corner, without mentioning inflation.

Till next time…

Related posts:

1. What is a Recession?
2. Knowledge is Recession Proof
3. The End Of The Recession Nears
4. Can We Fix This Recession?
5. Credit Crunch – Wants vs Needs