(this article was first published on 3 June 2010 under the same title. Republished here as a reference to my other post “The Inverted Square Root Economy)
In August 2007, the United States triggered what would be known as the Sub-Prime Credit Crisis then. Later, this evolved into the Global Financial & Economic Crisis. The crisis saw many renowned financial institutions in the United States and across Europe seeking bailouts from their respective governments using taxpayers’ monies.
Financial institutions which received bailout included Goldman Sachs, Citigroup, Bank of America, JP Morgan and AIG. AIG was the worst among the bailout recipients because it was already on the edge of bankruptcy. These financial institutions were rescued, while some were left to collapse, notably Lehman Brothers.
The crisis, the worst of its kind since the Great Depression of the 1930s, spread across Europe and Asia-Pacific. Billions of dollars in the form of rescue packages were dished out to boost the liquidity of the national and international banking systems in order to prevent the financial sector and businesses from collapsing.
Their collapse potentially results in more job losses and other societal problems.
While these rescue packages may have slowed down the crisis from worsening further, they have, however, effectively created a set of similar problem which is no different to that of the sub-prime. The financial markets were awashed with liquidity with properties and real estates prices soaring even way before global economy starts to recover.
The speculative rise in properties and real estates prices are due to available cheap loans. Both the financial markets and the financial institutions were lushed with liquidity. This effectively created the same bubble that triggered the global economic crisis.
Considering the currently still-cloudy economic condition, especially the unemployment rate, while taking in account of the prices of properties and real estates in Taiwan, Hong Kong and Singapore, there is no doubt that speculative activities are going on in the property and real estates markets.
Were there steps taken to curb these activities? Are these indications of an economic recovery?
Well, think again. Are we are in a recovery stage or are we still caught in the recession?
Not surprisingly, many economists are positive that global economy has recovered from the worst recession, while ignoring fresh signs of trouble in the PIIGS economy and calling the world to focus their sight on the “improved” economic data. However, regardless of how “improved” economic data have turned out to be, there are questions that still need to be answered:
With the private sector’s problems shifted to the public sector, and if the burden of which can no longer be passed on, how will the problem be unravelled?
At the end of the day, who foots the bill for the massive bailouts?
The crisis that began with concerns about sub-prime credits, and with its massive bailouts of financial institutions by governments, has evolved into the Sovereign Debt issue, which would appear as the latest phase of the crisis that started in 2007. As I had said before, in my opinion, this will not be a V-shaped recession.
It is certainly one that is going to be an inverted-square root, meaning we will have to go down deep before things start to really pick up. And even if the economy stays flat, the stock market will almost surely head back down when financial markets began to realize what a jobless recovery actually looks like.
Andrew Michael Teo 