In 2008, there were real concerns that the US economy was actually going to collapse. That would have led to a big recession, or perhaps another depression to rival the Great Depression of the 1920s and 1930s. But it was not just the US that was struggling. The entire global economy was experiencing crisis-level issues that most people were not sure how to solve. All many people could do was watch and wait, hoping that their investments would recover and their home values would rise again. There were also a lot of worries over jobs, and people who had very high-risk and high-end portfolios saw hundreds of thousands or even millions of dollars virtually evaporate, almost overnight. Here is what you need to know about the 2008 financial crisis and the lessons learned from it.
An Overview of the Crisis
The financial crisis that plagued 2008 actually started in 2007. That was the year that some of the mortgage securities essentially stopped working, because buyers and sellers of homes could not agree on prices. Typically, the financial market works well because buyers and sellers come to agreements. The government does not need to set prices or try to control those prices, because there will always be people who want to sell in a certain price range and people who want to buy in that same range. They can find a way to make a deal happen, and everyone is satisfied. But when that stopped working properly, due to a lack of pricing agreement, the impasse began to spread to other types of debt markets, as well. That spread was the start of the financial crisis for most markets.
The solvency of some banks was called into question by other banks, and that meant the two did not want to do business together. They suddenly failed to trust one another, even if they had been doing business together for a number of years. In the latter part of 2008, governments jumped in to assure the public that big banks would not be allowed to fail. Only then did the economy start moving again, and it was still a struggle to gain much traction. A lot of large companies, such as many US automakers, also accepted bailouts from the government in order to keep themselves afloat, because the economy had gone down so rapidly and recovery was very slow. In some parts of the world — most notably Spain and Greece — impacts from the 2008 crisis still linger.
Companies Took Actions That Defined Them
A number of companies went out of business in 2008 and the few years after that when the economy had still not fully recovered. These companies took actions they felt were right during the recession and afterward, but the problem was that a lot of these companies did not react quickly enough to the changing economic climate. People in the US mostly thought about what was taking place in their country, unless they came from another area of the world originally or kept up with international news. It was not always easy for people to acknowledge the damage the financial crisis was doing in other areas, largely because of the way many governments tried to downplay the seriousness of events. But companies that took rapid action generally fared better than others.
The US automotive industry was one of the areas on which a lot of people within the country focused. With the notable exception of Ford Motor Company, US automakers all took bailout money. Ford remained solvent enough not to need it, through smart management moves, layoffs, and cutbacks. The other automakers repaid the money when their situations improved, but it showed them that they may not have been as prepared for disaster as they first thought. Having a crisis management plan is very important, and it is one of the ways a company can protect itself if and when there is a crisis it is facing. But a lot of large companies in many sectors around the world were ill-prepared for the wide-ranging magnitude of the crisis in the financial markets.
Even companies that had crisis plans already in place started to quickly discover that they were not really prepared for something as large as a global financial crisis. While that was understandable, it left companies struggling to decide what to do. A lot of companies failed to figure it out in time, and they ended up closing up during the recession or in the months and years that followed. Companies that did make it through the crisis intact often had to take on more debt in order to remain solvent. They ended up owing more than they had before the crisis, and in some cases they are still paying that debt off, more than a decade later. Restructuring and renegotiating became common and popular for big and small companies during the 2008 financial crisis and beyond.
What Crisis Steps Companies Could Have Considered
Like with most issues that can be difficult to navigate when they are not easily understood or they are completely unexpected, the financial crisis left a lot of companies confused and overwhelmed. But there were steps that these companies could have considered, and which were mostly overlooked by the majority. Because a lot of companies did not have a crisis management plan, or did not have one that was complete enough for the situation in which they found themselves, they did not always make the best decision. That largely came down to companies realizing that they were sinking quickly, so they started making quick decisions in an effort to right the ship. Those decisions often just made a bad situation worse, instead of helping them get back on the right track.
Companies could have considered a lot of different things to stay afloat, but many of them waited too long and then panicked. Crisis steps that would have helped them succeed through adversity include being more aware of changing markets earlier on in the crisis, and not waiting for it to get better instead of doing something about the way it was at the moment. In other words, companies mostly just hung on and waited for improvement, without having a solid or set idea of when — or if — that improvement was ever going to arrive. Because of that, these companies lost out on a lot of adjustments they could have made in order to remain more solvent. Pulling back would have been a financially safer alternative, and companies that did so generally had a more successful outcome.
Struggling companies could have also reached out to crisis management professionals more quickly, in order to ensure that they had a plan in place. By working to mitigate the damage right from the start, these companies would have had a much easier time throughout the financial crisis and beyond. There was just one big problem with companies and their ability to do this: most of them did not know that the financial crisis would become so bad or go on for so long. In an effort not to overreact, most companies actually underreacted and ended up with serious financial problems — if they were able to stay afloat at all. Companies that made it through the crisis learned a lot of valuable lessons, though, which they could carry forward with them well beyond the crisis.
How Companies Found Ways to Survive
For the companies that did survive the 2008 financial crisis, and those that even got through the crisis relatively easily or with little to no lasting damage, there were a number of ways they succeeded when some of their competitors did not. The biggest way that companies survived was by noticing the severity of the issue early on and doing something about it right away. Effectively, companies that looked like they were overreacting for the current severity of the issue were actually doing what was needed for the future severity of the crisis. They survived due to that level of preparedness. Generally, these companies also had good crisis management plans in place. While those plans may not have been completely adequate, they were a good start toward survival.
When it came to finding ways to survive, companies also did what they had to do in that they cut back on their spending, their labor, their overhead costs, and much more. By pulling back at the beginning of the 2008 financial crisis instead of when it was essentially forced on them by market conditions, they were better able to weather the storm effectively. There were people who lost their jobs due to this, though, and that hurt the economy overall. Companies that tried not to cause additional economic harm or lay off people who needed their jobs were not as successful at getting through the crisis because their financial outlay was still too high to be acceptable when it came to navigating uncertain waters and a damaged economy that extended around the globe.
There were industries that were eligible for government bailouts and subsidies, and companies in those industries found ways to survive by accepting the help they really needed to stay afloat. They often still had to make changes, lay off employees, and pull back some from their usual ways of operating. But even when they did that, the additional help was what got them through the worst of the crisis. These companies would not have been as successful at applying for loans, because banking was one of the sectors that was struggling the most. It was very hard to get loans or mortgages, and many people who had credit lines or equity lines on their homes or businesses saw those lines frozen as property values plummeted and the financial sector struggled to recover.
Lessons Learned From the 2008 Financial Crisis
Like any major shake-up that affects the global economy, there were lessons to be learned from the 2008 financial crisis. The biggest of those was to be prepared, but it was also a good reminder that there are things that are very hard to be prepared for. Trying to get ready for something such as an impending, global economic collapse is not realistic for most companies, many of which run on thin margins and may not be able to have the kind of solvency needed to survive a significant or long-term recession. Still, preparing as much as possible is important, as is taking crisis management and planning seriously. Companies that had good crisis management plans fared better overall than those that did not, or that had not updated their plans in some time.
Another important lesson from the financial crisis of 2008 was to start early with making changes when a problem arises. Most of the companies that appeared to overreact at the beginning are still around today, while companies that did not take quick action failed in greater numbers. That is important to consider, because many companies want to wait and see how things develop before making a lot of changes. While it is understandable to want to do that, it may not be the wisest course of action during a crisis. Paying close attention to the predictions of experts — and taking those predictions seriously — can be the difference between a company making it or not, when there is a crisis looming in the financial world or other areas of business and life.
In short, prepared companies that took quick action were the ones that survived the 2008 financial crisis more easily. They were also the ones who needed less help and the ones who got back on their feet faster when the crisis had passed. There are no guarantees that good planning and quick action can save a company, but the chances of success are higher when those things are carefully considered. Proper crisis management is a big part of that, and something all companies should have learned after witnessing or experiencing what took place in 2007-2008, as well as the way it affected companies for years afterward.
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