The Current Economic Downturn: It’s Totally Different Than 2008

Back in 2008, a speculative bubble burst. It was caused by large US banks gambling with depositors’ funds. It resulted in an economic collapse that it took almost a decade to recover from.

Purse, Money, Credit Squeeze, Wallet

A little economic history: in the 1930s, the Glass-Steagall Act was passed that prevented banks from trading its deposits. By 2008, its provisions had effectively been eliminated by bank lobbyists. So banks started trading its deposits. What did they trade?

As we all know, there is a real estate cycle. It usually goes up for 4 years give or take and then down for a while. It had gone up for quite some time leading up to 2008 spurred on by bullish trading in “asset-backed securities” (ABS). What are ABS? They are “supposed” to be securities that have assets of equal or greater value backing them.

As it turned out, many of these so-called ABS had nothing backing them. Or even if they did, nobody could document where this backing came from. This was because they were bundled together and sold as packages and their documentation was lost. So when one of these failed in 2008, people wondered about other the backing for other ABS and the entire market collapsed. Keep in mind that banks, with no real controlling regulations, were trading them. That lead to runs on banks, and many of them collapsed.

2008 – 2009 Losses

And the fears resulting from the ABS bubble caused stock markets worldwide to crash. Back in 2009, I estimated a stock market wealth loss of $29 trillion. A friend of mine who worked at Bloomberg said “My Bloomberg terminal has a handy function for world market capitalization. It accounts for every stock on a public exchange.” Since October 2007, it put the global stock market loss closer to $36 trillion Ouch!

To get a total asset loss, we need to add to that $36 trillion to my estimated global real estate loss of $14 trillion. That means individuals globally lost $50 trillion in capital value. It was unprecedented! And in contrast to what just happened, it meant that people felt poorer. And with their retirement monies gone they understandably cut back on expenditures. And businesses in turn reduced investments. Because of these twin expenditure reductions, unemployment increased causing a further drop in income and further expenditure reductions.

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