Ten Years since the Crash

A Retrospective

New Bubbles on the Horizon

A casual examination of the financial press reveals the tendency to explain market movements on the bases of “events.” That is, price movements are often rationalized on some economic or political innovation. Even though a priori it might seem like different assets in different markets are not necessarily influenced by the same information sets, the findings of seventy plus years of empirical studies indicates that this is the case if one focuses on their statistical properties. Thus, seemingly random variations in asset prices share nontrivial statistical properties. These properties are called stylized empirical facts, a term coined by Nicholas Kaldor who in 1961 suggested that economic theory construction should begin with a summary of the relevant facts. A key purpose behind the concept of stylized facts is to help build adequate models for the questions under investigation. And to achieve this objective, a basic concern is to ensure the model remains parsimonious enough so no irrelevant details distract our attention while still sufficiently rich to seize all the relevant aspects.

So, in the 10th anniversary of Lehman Brothers’ filing for Chapter 11 one might wonder whether the long and profound financial crisis that surrounded this event has taught a lesson to policy makers and investors alike. Do we have this parsimonious model that is rich enough to capture all meaningful details? Have the experts been able to assess correctly the key causes and correlations that transferred risks assumed on the one side of the world to countries thousands of miles away? And equally important, has this knowledge had any impact in monetary and fiscal policies and in other relevant laws, regulations or policies that could help prevent the repetition of equivalent future crises.

In sight of the expected hike in interest rates that for the first time in 10 years will rise above inflation and six months into 2018, the experts’ consensus describes an environment of high volatility, disperse returns, lots of uncertainty and incipient bubbles. Thus, one might wonder if quite to the contrary we did not learn the right lessons and the quantitative easing response carried out to inject “cheap” liquidity in the economies is fathering the next bubble.

The consequences to be felt when policies are reversed and interest rates start to increase are anyone’s guess. But the monetary expansion going back over thirty years has rewarded speculators handsomely and the decade old synchronized monetary and fiscal stimulus policies going on across the major economies has been proposed as the key contributor to the next bubble: one to the tune of US$100 trillion, 1.5 times the world’s GDP.

The world is full of speculators and the reason is that many among these have learnt to take advantage of such situations and expect to do the same in the future. Furthermore, countless speculators work as money managers and use the money of other people to bet. Hence, they are incentivized to take risks while creating high growth, even if fictitious, is in the interest of short-term-oriented politicians. This is why the interaction between policymakers and speculators has been so effective in creating repetitive boom-bust cycles.

As it appears that the structural problems prevalent in 2008 are still with us and that global growth is highly dependent on bubbles the expert’s consensus is that when the interest rate surpasses inflation, it will become wobbly and along that path bubbles in cryptocurrencies, bonds, technology, and housing will pop. Thus, once more we find ourselves at the start of an apparent bubble-cycle, a time when we shall need to carefully disentangle the dynamics underlying large volatility incidents and those by which the impact of financial local events is transmitted across the globe affecting markets worldwide.

Eva R. Porras (Madrid, Spain), author of Bubbles and Contagion in Financial Markets, Volume I and Volume 2, is a financial and business consultant, providing financial expertise to numerous multinational businesses. She is currently serving as Head Consultant for Business Valuation SL in Spain; Habitat Property Partners in Budapest, and is the Director of the International Programs in the Business School of the Universidad Internacional de La Rioja in Spain.