2008 financial crisis

2008 financial crisis was triggered by the subprime mortgages market. This market was liquid before the crisis started. However, when the price of subprime mortgages declined, then the banks still kept massive amounts of these assets in their balance sheet. This resulted in massive losses for the banks.

Bank-bailouts by the central banks followed. Central banks created large amounts of the new base-money and lent it to the commercial banks, which could use any assets, including low rating assets as collaterals. The regulations regarding bank balance sheets were changed – the banks did not need to report these assets on the market prices (which was very low), but they could report these assets on the “mark to model” prices (which is arbitrary). Additionally, central banks bought these bad assets from the commercial banks at the nominal price.

However, in the meantime, the banks started lending less money because the general risk in the economy increased.  The credit-crunch followed, the economy received less bank credit and the recession followed to the 2008 financial crisis.

This crisis was called “The Great Recession“, as opposed to the “Great Depression” in 1929 – 1933. It was the biggest recession after the Great Depression. The economy did not recover from this crisis, the central banks kept interest rates down and Quantitative Easing followed.

The damage from the recession was much lower than the damage from the central bank policies following the recession. The market forces were not applied, the self-healing of the economy was not possible. This resulted in a bigger credit bubble, in even bigger government debt, and even more, in un-productive use of capital and more zombie companies. The central banks created the bubble of the bubbles, which was looking for a needle.