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2011 is not 2008-here is why

General Angela Calla 17 Aug

While there are similarities, 2011 is not 2008. And it’s unlikely that we’re in for the same sort of market collapse we saw three years ago.

First of all, the fuel of the 2008 meltdown was an overleveraged US economy, and the match that started the fire was the collapse of the investment bank Lehman Brothers. The financial institutions were full of the now-famous “toxic assets” – basically, rotten debt. And because of the interconnectedness of the global financial system, no one wanted to lend anyone any cash. Credit dried up for almost everyone, including the Mom-and-Pop businesses on Main Street. Soon, even perfectly solvent businesses couldn’t access credit… or pay their bills and the recession was born.

But the trigger that started last week’s market mayhem was a downgrade of US government debt. Lehman had no money to pay its bills, while the US government does. The debt-ceiling story in July and early August was not a financial problem, it was a political one. The US economy is perfectly able to pay its debtors, either through cuts to spending, or through raising taxes. There are options on the table, but US politicians can’t agree on which bad medicine it wants to swallow. Lehman Brothers, on the other hand, had no options, and no medicine. It was bankrupt.

Secondly, leading up to 2008, enormous bubbles in both the US housing market and global equity markets were building. No one wanted to spoil the party, especially in the housing market where everyone was getting rich! But, looking back, it’s plain to see that problems were brewing. Typical for market bubbles, the bigger the bubble the more painful and spectacular is the bust. In 2011, however, there aren’t really any bubbles to burst. The US housing market is still DOA from the collapse it suffered three years ago. Stock and commodity prices, while having recovered significantly from the lows in 2009, are less out of line with reality than they were in the summer of 2008. Today, only gold is showing classic signs of a price bubble.

Click here to hear more from Todd Hirsch, Senior Economist for ATB Financial