There was palpable relief as at the end of 2008 the “financial” crisis moved into the “real” economy. Commentators could move to the relatively familiar language of “recessions” and “depressions”. The arcane minutiae of securitised debt, derivatives and toxic three letter acronyms (ABS; CDO; MBS; SIV; CDS etc) could be left behind. Familiarity, no matter how terrible, is comforting.
Shell-shocked investors are coming to terms with the financial carnage of 2008 that saw their portfolios decline substantially in value. The value of investments fell to such depths that investors needed specialised diving equipment just to find what anything was worth.
In recent years, money was cheap and other assets were expensive. As each of the global economy’s credit creation engines breaks down and systemic leverage reduces, money becomes scarce and expensive triggering adjustments in asset prices in a reversal of this process.
Financial crises increasingly result from the structure of modern capital markets. External shocks – such as declines in housing prices – are transmitted via connections between participants who are tied together by complex chains of dealings. Concentration of trading amongst a small group of large dealers exacerbates the risk.
On 30 October 1938, the American Radio Drama series Mercury Theatre aired “The War of the Worlds”, directed by Orson Welles. Adapted from H.G. Welles’ novel, the first half of the broadcast was scripted as a series of dramatic news bulletins of a Martian invasion. Listeners who had missed or ignored the opening credits assumed that the invasion was real. People fled their homes. Police were swamped by panicked phone calls. Today the financial equivalent of this broadcast would be the announcement: “we interrupt regular programming to announce that the United States of America has defaulted on its debt!”
In the Arabian Nights, the beautiful princess Scheherazade buys one day of life at a time by recounting fantastic fables that enchant the King who has condemned her to die. Investors and traders are currently telling each other fairy tales to buy one day at a time to stave off the inevitable.