It cannot be that you haven’t heard of the financial crisis. Bailout, crisis, Dexia, Fortis, etc. are buzzwords discussed on Twitter and are all over the financial news.

What happened and will it affect Internet companies?

It is a very complicated story, but with my financial economics master of science degree, my experience as a broker on the Amsterdam Exchange (10 years ago), and the fact that I lived in Argentina during their major financial crisis, I’ll do my best to share my thoughts on this economic turmoil.

The first problem

The American economy has shown a deficit on the balance of payments for something like 50 years in a row. Meaning that they import more then they export, or in other words they sell more dollars than dollars are bought. According to economic theories a deficit on the balance of payments should lead to a weakening currency. A lower dollar makes import more expensive and export more attractive and this would turn the deficit into an excess on the balance of payments. The problem… this never happened.

The dollar stayed strong. How is that possible? Well on the other hand a lot of capital investments got into America, people/companies investing in American companies, but foremost it was China that kept on investing / lending money to the US government. This way China bought billions of dollars (to keep the dollar strong in comparison to the Yuan, so that America would keep on buying Chinese export products). America financed their growing economy with borrowed money, mainly from China.

The second problem

In the US, real estate prices were soaring. The American economy lived on the rise in housing prices. It was easy to get a mortgage (and a second one) to finance houses, cars, holidays, burgers etc. Because the prices of American real estate kept on rising, people could borrow money based on their property. People kept on borrowing and now most Americans live in debt. All those mortgages need to be payed off, but a lot of Americans can’t pay the rising bills. Some banks were highly exposed to ‘bad mortgages’ and needed to borrow huge amounts of money (from other banks) to ‘keep things alive’. Interbank rates rose because the risk got higher. Then the first banks started to fall apart and nobody exactly knew which bank was exposed to this new threat. Trust is the main driver of our economic system and trust began to fade.

The people on Wall Street took outrageous risks (and reaped outrageous rewards) hoping and counting on a safe parachute (the government) to land when things got bad. A failure of the American economic system would lead to a worldwide depression and that is not what the government would let happen, bankers thought.

Well things got out of hand. People are panicking, there is no trust in the banking system and everybody is dumping their stock.

The bailout plan got refused, stocks are going down and we’re on the verge of the biggest financial depression in the history of mankind.

What does that mean, how will it affect us?

This is really hard to predict. As long as there is no trust and people believe it is better to put their savings in ‘a sock underneath the bed’ we all have a big problem.

But okay, lets see what’s kind of easy to predict:
The financial sector will be hit hard, that is for sure, but as Microsoft CEO Steve Balmer said earlier today “No one is immune from this financial crisis”. Financial issues are going to affect both business spending and consumer spending. So we’ll see a downturn in the global economy.

For the Internet industry, this is also bad news. The next one or two years will be tough ones for startups in search of investment. Investors will take less risk, and will invest in startups that already have a proven business model in place. The time of throwing money at entrepreneurs who claim to have “a great Internet idea where people can share…. social… ” will be over. We’ll see a shake-out of small Internet services who can’t find a way to get their users paying for their service. I believe that it will be essential for small startups to charge money as of day one to make it through this financial crisis. (If there is no money available from investors, who else is going to pay salaries?)

In the short term, we will see a decline in advertising budgets for all companies, but in the medium term I expect an increase in budgets for web advertising. Companies will have to spend their money more wisely, so I expect a bigger shift of budgets to the web, at the expense of TV and Newspaper advertising.

In the end, our economy is all about trust, trust in the banking system, trust in the people you work with, trust in the companies you work with, etc. The web ,and everybody working in the sector will notice the crisis, but new opportunities will arise and the web will come out stronger.