In one chart:
Ten years since the drop
One decade after the bottom of the global financial crisis, what have we learned?
Sebastién Galy, Sr. Macro Strategist Nordea Asset Management
The great financial crisis taught us an important lesson about how complex the global financial system is. Many people, including myself, were convinced a crisis was coming and had sometimes taken losses by going in too early. Yet the extent of the leverage and interdependencies surprised many of us completely. Regulation had allowed for high leverage and hard-to-price assets, leaving banks with tainted assets that resulted from trading, hedging or risk-taking activities. It would take, in some cases, years to wind down these bad debts as regulators discouraged hard-to-price assets and high leverage and introduced liquidity requirements. As a consequence, some highly complex products disappeared while some commercial activities shifted to the shadow banking sector, which offloads risks to end asset holders.
The Fed, ECB et. al. stepped in to support the economy and absorb risks by introducing Credit/Quantitative Easing as well as sometimes negative interest rates. The consequent pile of housing related debt is a reminder of Japan’s burst housing bubble. Provided central banks can help maintain a decent pace of growth, these potential bubbles should eventually deflate in a manageable way as is happening in the US. The risk though is that low rates lead some countries, such as Italy, to once again fail to reform until it’s too late leading to a vicious repricing of their sovereign risk.
In the decade since the market crashed, we have acquired powerful policy tools (quantitative easing, forward guidance, twists, etc.) that have helped the global economy. The danger lies in the unintended consequences of these new tools as they are introduced, such as a temporarily higher inflation target.