March 5, 2021

Financial Turmoil Evokes Comparison to 2008 Crisis

Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008.

The answer is a matter of fierce debate among economists and market experts. Many say the risks are lower today — at least in terms of an immediate crisis — because the financial system over all is healthier and there are fewer hidden problems. But the experts add that there are reasons to worry, and they do not rule out a quick downward spiral if politicians in the United States and in Europe cannot calm investors by addressing fundamental financial threats.

  The core problem, as it was three years ago, is too much debt that borrowers are having a hard time repaying — but this time it is government debt rather than consumer debt.

“So far it’s not as bad as 2008, but it could get much worse because the sovereign debt concerns are much more global than the subprime mortgage risk of 2008,” said Darrell Duffie, a professor of finance at Stanford and an expert on the banking system.

A growing lack of confidence is perhaps the most troubling similarity to 2008 and the biggest worry. “There’s a level of fear out there that is a little similar,” said Michael Hanson, a senior economist with Bank of America Merrill Lynch. “It’s not just the fundamentals. It’s the fear of the unknown.”

Most of the attention so far has been focused on volatility in stocks, with investors spooked by three heart-stopping declines in the last five trading days — including Wednesday’s 4.6 percent drop in the Dow Jones industrial average.

But the bigger concern of many financiers and government officials was signs of stress on Wednesday in European credit markets, which are essential to financing the day-to-day operations of banks and companies there.

Unlike the 2008 crisis, which began in the United States and spread worldwide after the bankruptcy of Lehman Brothers and the near collapse of the giant insurer American International Group as subprime mortgage defaults surged, today’s situation began overseas. The mounting fear about European banks’ exposure to sovereign debt is now fraying nerves here.

Financial institutions across Europe have huge holdings of government and corporate bonds from Greece, Ireland, Portugal, Italy and Spain. Concerns about defaults are growing.

Some insist that the comparisons are overblown. “It feels completely different,” said Larry Kantor, the head of research at Barclays Capital. “I don’t think there is a U.S. debt crisis right now, and European debt is not held as broadly as mortgage debt or derivative debt was back in 2008. The prospect of a 2008-like drop in the market is remote.”

Experts add it is important not to confuse a stock market rout with an all-out panic.

“I think it’s quite different than 2008,” said John Richards, head of strategy at RBS in Stamford, Conn. “This is a stock market correction based on slower growth and the increased probability of a recession. In 2008 we had a genuine funding crisis, where banks were reluctant to lend to one another.”

Others on Wall Street maintain that the turmoil is playing out in similar fashion. Traders compare the threat from Greece that prompted the sovereign debt crisis a year ago to Bear Stearns, whose fall in March 2008 was a dress rehearsal for the broader crisis that followed six months later. For these would-be Cassandras, the huge debt loads of Italy and Spain are now equivalent to Lehman and A.I.G., institutions whose downfalls threatened the stability of the entire system.

In an ominous echo of 2008, European bank stocks on Wednesday fell 10 percent or more — and banks in Europe are beginning to hoard cash, crimping the interbank loans that keep the global financial system operating smoothly. While borrowing costs for banks in the United States and Britain have crept up only slightly recently, borrowing costs for Continental banks that lend to one another have doubled since the end of July.

More optimistic market watchers point out that these rates are still well below those at the height of the financial crisis. But they nonetheless are the highest since the spring of 2009.

Because European banks trade billions of dollars daily with their American counterparts, fears of contagion have spread.

Along with the fear is a measure of denial in the period leading up to now, one more echo from 2008. Even as evidence of the subprime threat mounted through 2007 and into 2008, stocks continued to levitate, with the Dow industrials touching 13,000 not long after Bear Stearns had to be rescued. And even as the economy weakens, Wall Street is still predicting earnings in the fourth quarter to be 23 percent above last year’s level, a target that is looking more out of reach by the day.

Then, as now, there were huge stock market swings, up as well as down. For example, the Dow plunged 777 points on Sept. 29, 2008, after Congress initially rejected the proposed Troubled Asset Relief Program bank bailout, only to rise 485 points the next day. But over all they kept plunging, with the Dow bottoming out at 6,547 in March 2009.

There are, however, some very important differences between now and then that could make the banks more resilient.

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