ColdFusion: How the 2008 Financial Crisis Still Affects You
While markets are supposed to be forward looking, investors often get caught up making comparisons to the past. There’s also a recency bias, so that more recent problems take hold front and center.
The most recent crisis that investors compare today’s markets to is the 2008 meltdown. Driven by an overleveraged housing market fueled by easy money, today’s markets face different challenges. But many pains from 2008 still remain.
The destruction of demand from the housing bust led to a number of problems still impacting economies today. That can include everything from reduced housing demand over the last decade, to lower fertility rates.
Some even see the crisis as the death of the “real economy.” Instead, we had a push towards creating a “wealth effect.”
Simply put, by printing money and allowing assets like stock prices to rise, policymakers bailed out the wealthy. As their wealth rose, they felt able to spend more on goods and services. That in turn finally stimulated the economy.
But it came at a high cost. Money printing and low interest rates distorted the capital structure. And investors are still struggling today as a result.
Today’s rapidly-rising interest rates have created a challenge. But so far, the effects are still low relative to the lasting effects of the 2008 crisis. And policymakers have learned that they can simply print money for any problem. That lesson may not always hold true, and could lead to trouble when that changes.