Most people just don't understand how bad it nearly got. Whilst everyone who has been paying any attention to the news over the last 3 years is perfectly well aware that the banking system crashed in 2008, most think of it as significant, but not earth shattering.
Once it is understood how bad it could have got, why it needed rescuing, and why it wont be possible to rescue it next time, it only requires one last ingredient- the understanding that there will be a "next time" and that it is coming very soon, to start up a cauldron of real fear.
I'll try and make it as clear as possible. For many years the world economy had been in a state of deep sleep on a runaway train, being kept alive through a drip feed of "credit", but so subdued by its own apparent success that it arrogantly behaved as if there was no danger. The problem was that it became hungrier and hungrier, polluting the planet faster and faster, and using finite resources and land faster and faster. As supply shot up and demand faltered, we saw the oil price spike, the food price spike, the price of metals spike, you name it, it spiked. What happened is that all of these made the production of others that were related to them grow even faster. As the commodity crisis of 2007 spiralled out of control, some of the worlds biggest firms issues profit warnings, which led to jitters in the stock and equity markets. As commodity inflation eroded profits, firms laid off workers, who were already struggling to pay higher living costs. Then, everybody stopped paying their debts, and the economy sank into recession, and this rest is history.
We must be clear that the recession certainly can not have been caused by the banking crisis. In America for instance, the first declines in GDP figures were posted in the summer of 2008, just as the oil price reached an all time high of $150 dollars. The American "commuter" way of life was hit hard, and this only worsened the situation with the sub prime credit markets. The banking crisis actually happened in the Autumn, so it is simply false to argue that it caused the decline in GDP, since it actually happened after this had started. The banking crisis occurred because banks balance sheets became corrupted by asset write off (they had to write off bad debt that had defaulted) meaning that they had less money left over to lend. What's more; many banks were operating on the fringe of financial viability, preferring to lend borrowed money rather than use their own cash. This was an inherently risky strategy that only worked as long as there was growth. The problem was, growth stopped. Many banks completely ran out of money and had to be saved by emergency government loans. In the UK, Royal Bank of Scotland was 2 hours away from having empty cash points. As desperate depositors would have rushed from bank to bank, the "contagion" would have spread like some sort of super-virus, and we would have seen society descend into mob-rule within days.
As the recession clamped down, demand fell back within the supply capacity of vital commodities, and consumers were temporarily relieved by the crashing price and could afford to buy more again. So what happened is commodity prices started to soar yet again and have followed the recovery upwards through 2009, 2010, and now the early part of 2011. It is becoming obvious that these prices have got too high again, and companies (and now the indebted public sector) are laying off workers and posting profit warnings (such as the electronics retailer Dixons/Currys did in the UK three days ago). This is just the start of a near repeat of the 2008 near miss, but but this time, the collapse will be the real deal, because governments are not in a position to provide more bailout money. Debt is now a problem in every sector of the economy, firstly because it is now much larger, and secondly there is extremely little prospect of the economy growing fast enough to pay the debt. For instance, the UK's already austere public spending plans for the next 4 years are based on the assumption of 3% a year GDP growth- something that looks increasingly unlikely. When the next financial crisis hits (be it another banking crisis, or a sovereign debt crisis in Europe) everybody will be so overwhelmed by debt, there will be practically nobody left to go to for a bailout, and the global economic and financial system will just start to rapidly shut down. It's likely to occur later this year or next. Prepare.
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