August 2008 signified the start of the GFC when the French Bank BNP Paribas froze three money market funds which had taken heavy losses on US subprime mortgages. Immediately the ECB and the US Fed entered the fray and injected cash of 90bn to ensure that bank lending didn’t grind to a halt. The subprme debacle was merely the first in a series of major failures.
Keynes said in 1931
“We are today in the middle of the greatest catastrophe – due almost entirely to economic causes – of the modern world”
When Lehman brothers collapsed in 2008, even cautious forecasters expected recovery in three or four years. However, governments are grappling with an appropriate policy that will achieve growth when you are trying to implement austerity measures at the same time.
Even in 2007 the US the Fed was concerned about the looming threat of a credit crunch and proceeded to drop its key borrowing rate by 50 bps to 5.75%. Although soon after Ben Bernanke stated that the housing market collapse would have a limited impact on the economic growth in the economy. Bernanke obviously was too optimistic about the state of the US economy and soon after the Lehman Brothers collapse the credit crisis had officially begun.
Total debt levels in the US, UK and the eurzone are now higher than in 2007.
We are currently seeing soft data in all three time zones. The Week magazine came up with some thoughts about this:
* Too much saving – the results of exorbitant imbalances in trade and capital flows
* Asia’s saving growth flooded the global bond market, which enabled the West to continue running huge current account deficits until the economy was slowed.