Echoes of 2008

The article we are commenting on today appeared on the online edition of “The Economist” on October, 8t and is called “Echoes of 2008”. It brings out the vulnerable financial situation in Europe.

The indebted countries from Europe are blocking the ECB’s capability of funding and also other banks are not lending to each other. Such crisis is threatening to reach America which, on top of this, is confronting with other economic problems.

A situation similar to 2008 when Lehman Brothers collapsed seemed to be happening in America. Given this the governments stepped in to help their banks in countries like France and Belgium where they said that they would guarantee the debts of Dexia, a lender that was bailed out in 2008.

One thing is sure that if policymakers have learned from the mistakes made in 2008 the situation should not repeat. To prevent this some solutions need to be applied such as: American banks need to be more transparent about their ties to Europe, recapitalize the European bank system by helping countries like Italy and Spain financing their debts.

In this article we have identified the following keywords: bank, government, recapitalization, banking system, insurance.

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In the beginning we find out that the European banks are confronting with a similar situation that happened in 2008 meaning that their access to funding is limited and they are not lending to each other. This crisis appears to be a global one because not only European banks are on the path to collapse, America being affected too. Banks there led the S&P500 into bear market territory, which is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining.

To prevent panic around the employees and to prevent this from affecting the work quality a chief executive of one of these embattled institutions Morgan Stanley even sent a memo to the employees reassuring them that this crisis can be avoided.

A bear market should not be confused with a correction, which is a short-term trend that has duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.

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Obviously, European countries have been going through a tough time economically. Something must be done soon or all the European economy will collapse.

The situation in Europe is not the only thing America has to worry about, but is the main problem they have to face, except their anemic economic growth and new regulation and litigation related to America’s housing bust.

A main concern could be that any defaults there leading to losses could therefore affect any bank in America exposed or in relation to those banks.

Moreover it’ brings out that America has nothing to boast in economic policy. This means that SUA must be very cautios and that government should intervene to support their banks.

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Given that the 2008 situation presented similarities that shocked the banking society the governments had to step in to give an extra help to this problem. Large segments of the European banking sector are technically insolvent.