Saturday, September 01, 2018

How the Financial Crash of 2008 could repeat itself

Professor Adam Tooze talked to a packed audience at the LSE: 'Each time a crisis is solved, it returns with a vengeance. If you look at crashes starting with  Long-Term Capital Management in '98, the .com crash of 2000, the financial account frauds of 2001

- or the mortgage-backed securities-driven financial meltdown of 2008, they are all increasing in amplitude.'

He continued to say that the big problem is that the Fed, the government, Central Banks, and so on have to move heaven and earth each time to fix the problem.

Then within a few years, we're all acting like nothing awful happened. You have the problem of Moral hazard endemic in this industry. 


2008 - 'Too big to fail' - 2018 now they're even bigger



Everyone remembers the phrase 'too big to fail,' right? Ironically, a result of the government fixing the last crisis is that there are even fewer banks, which are even bigger than before.

But in 2008, something REALLY BAD happened, and we were fortunate to get out of it. It cost a fortune - $13,000,000,000,000 (thirteen trillion dollars) of taxpayer's money, and we're still suffering the consequences.

- Brexit.
- The Election of Donald Trump as US President.
- The debt crisis in Portugal, Greece, Spain, Ireland, Italy & Iceland.
- The rise of 'Popularism' and the far right in Europe. 
- Productivity growth stagnation (particularly in the UK).

They are all, arguably, consequences of the 2008 Financial Crash.

Federal Chairman Ben Bernanke's quote that 2008 was 'worse than the Great Depression' but for the US Government's intervention.


Banks on the brink of Bankruptcy in 2008



On the surface, it looks like it's all ok right now.......

The US Federal Reserve spending

But check this chart below, out - Our Economies had to go into a war-time footing, in 2008, last seen during World War 2. And we are not back to normal now.



The Housing Market

What about this, the housing market. See that big loopy curve at the end of the chart that looks entirely different from the rest? That's right now. 




This chart shows when the government deficit took off - they needed to spend a fortune to prop up the failing banks and financial institutions.

Government Debt and the UK's 'Austerity' policy

Check out when government debt started to take off, in this chart below: 2008, just when the Crash in the Financial Sector happened.


What would you think if restaurant review sites like TripAdvisor or Yelp were paid for by the restaurants?

That's precisely what happened at all the rating agencies during the crash. And it's still happening today. The rating agencies are paid by the companies they rate. 

During a Congressional hearing into the 2008 financial crash, an email was discovered from a rating expert.

He had written: 'Let's hope we are all wealthy and retired by the time this house of cards falters.' 

I had a personal experience of something similar when living in Boston, USA. I regularly met up with a major bank's head of the Mortgage-backed Securities Sales desk.

He used to laugh at his analyst projections, ignoring the last 'black swan' property crash.

Companies like Bear Stearns and Goldman Sachs were shorting (Betting against) Mortgage-backed securities while another part of the company was selling them. 

I also knew a CEO at the helm when this financial meltdown happened. He was distraught for a time. He was scared he would be prosecuted for fraud and sent to jail.

However, He walked away with $30 Million in severance. US Taxpayers had to bail out his company for $189 Billion.

The biggest bailout in History - will the next one be bigger?


It became evident during the lecture how little could be done during the crash without the USA. The Federal Reserve guaranteed loans not only for US Banks but for banks across the globe. 

It's irrelevant what those in the European Union say; we would have all been sunk without the US's action. Professor Tooze said, 'The European Central Bank became the 13th Federal Reserve district.'

I still laugh when Politicians in the UK say that the UK Chancellor (equivalent to the Secretary of the Treasury) got us into the sub-prime disaster. Firstly, it was the banks that did that. Secondly, it started in the USA and was a global phenomenon.

Europe is still suffering from the effects of the subprime mortgage collapse. Spain, the size of Texas, has youth unemployment at 50%. Greece is in a similar position. 

Professor Tooze told us we are on a path of ever-greater fluctuation in Economic Downturns.

In 2015-2016, we narrowly dodged a recession spreading from Russia, Brazil, and South Africa, the collapse of commodity prices (notably, Oil), and the Chinese Yuan.

Where will the next crash start? - China? or the Banks again?

Professor Adam Tooze was particularly gripping when he revealed the comparative chart of the banks' vulnerability to a similar future shock. 

He pointed to Deutsche Bank as by far the most exposed, just adding, to much laughter, that no one could be surprised because Deutsche Bank was universally regarded as a “basket case”. 

No 2 did cause some consternation in the room - HSBC. 

Five of the biggest banks in the world are now Chinese. 



Fall-out from Silicon Valley Bank Collapse & Bailout 
(added 19/3/23)

SVB had grown extraordinarily fast, with total assets almost doubling from $116 billion at the end of 2021 to $216 billion at the end of 2022, making it the 16th largest bank in the US and the second largest bank failure in US history.