There are three fundamental differences between the financial crisis of three years ago and todays events. Starting from the most obvious: The two crises had completely different origins.
The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector’s breakdown that caused the recession.
The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.
That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.
The second difference is perhaps the most important: Financial companies and households had feasted on cheap credit in the run-up to 2007-2008.
When the bubble burst, the resulting crash diet of deleveraging caused a massive recessionary shock. This time around, the problem is the opposite. The economic doldrums are prompting companies and individuals to stash their cash away and steer clear of debt, resulting in anemic consumption and investment growth.
The final distinction is a direct consequence of the first two. Given its genesis, the 2008 financial catastrophe had a simple, if painful, solution: Governments had to step in to provide liquidity in droves through low interest rates, bank bailouts and injections of cash into the economy.
The policy didn’t come cheap, as governments world-wide poured around $1 trillion into the system. Nor was it fair to the tax-paying citizens who had to pick up the tab for other people’s sins. But it eventually succeeded in avoiding a global Depression.
Today, such a response isn’t on the menu. The present strains aren’t caused by a lack of liquidity–U.S. companies, for one, are sitting on record cash piles–or too much leverage. Both corporate and personal balance sheets are no longer bloated with debt.
The real issue is a chronic lack of confidence by financial actors in one another and their governments’ ability to kick-start economic growth.
Trust problem after the initial shock in 2008 lasts longer till today