Economic pundits are working overtime this week to convince us all that the current stock market free fall is not in any way a repeat of 2008. The need us to keep the faith. They cite several differences from 2008 and always conclude their arguments with the much repeated phrase “the markets have learned their lesson.”
A lot of companies that have lost significant value in the last two weeks may wonder what that lesson was and if it was learned why is so much of their value gone?
The Great Recession of 2008 was caused by too much debt. Primarily represented by loans to borrowers who bought homes that did not remotely have the ability to pay those loans back. Institutions invested in those loans because they offered high rates of return when nothing else did. They were not worried if those loans could be paid back, they only wanted the money they supposedly generated. When it became obvious those loans could not be paid back, the banks and institutions that invested in them stood to lose a lot of money and many would have gone bankrupt, along with our entire economy if not for the Federal Reserve and their ability to print money, also known as Quantitative Easing.
How is that different than today?
Let’s look at some facts.
Currently there is 9.8 trillion dollars of corporate bonds issued to non banks that are located outside of the United States. Yes, that is trillion with a “T”. In 2008 this number was 5.3 trillion. This is not quite the same as sub prime residential mortgage debt, as I am sure this debt has the ability to be paid back as agreed upon. Right?
Our government debt is currently 101% of our gross domestic product, compared to 63% in 2008. The most current budget bill passed into law in December of 2015 increased spending by 80 billion dollars over the next two years, totally ignoring the sequester spending caps that Congress had set upon itself.
One of the factors contributing to the Great Recession of 2008 was an investment vehicle called a “Synthetic Collateralized Debt Obligation.” Basically, rather than this being a debt obligation backed by a pool of loans, it was really just an investment in an investment based upon a pool of loans. Or in other words a bet against a bet that the original loans would be good or bad. This investment vehicle greatly contributed to the severity of investment losses in 2008 and we were told would be prohibited from being utilized as an investment going forward.
In December of 2015 Fannie Mae and Freddie Mac, (two government sponsored entities responsible for expanding the mortgage market by issuing or backing collateralized debt obligations, or CDO’s), announced they would now again be using synthetic CDO’s to transfer their risk from the taxpayers to investors. The American taxpayer had to bail out these two entitles in 2008 after it was discovered they were bankrupt due to improper lending and structuring insolvent investment opportunities. Now in order to relieve the taxpayer of this burden they are again structuring investments that are backed up with nothing other than the taxpayer whom they are trying to unburden.
I have never claimed to be the smartest person in the world. Nor do I have the corner on common sense.
However it has become painfully aware to me that the current market collapse offers up a sense of déjà vu all over again. This may not be the big one, nor the correction that will change all of our lives. But then again it may be just that. The markets can not tell a lie and can not tell the difference between now and 2008. All they know is that in our current environment of low interest rates, the Federal Reserve printing money and way too much debt, people will do what they always do.
The same as my characters in THE REASON, my fictionalized version of the Federal Reserve and the disastrous effects of their attempt at control.
Make bad fiscal decisions.
Until they are stopped.
By having the Federal Reserve change our current economic policy.
Or by…………..losing a lot of money.
Trillions. With a “T”.