2008 US Financial Crisis VS 2012 European sovereign-debt crisis

[freedom]

in 2008 - 2009, during US financial crisis, US government bailed out financial institutions. After the crisis, so far most large bailed out financial institutions such as JP Morgan, Goldman Sachs, BAC and Citi has repaid in full or partial the bailed out money. And US government made some profit from recapitalization of Citi and AIG through common equity participation.

in 2012, can ECB/EU solve European sovereign-debt crisis in the same way? I doubt so.

Unlike troubled European sovereign states, US bailed out financial institutions are private companies. They are profit driven, and they are driven to repaid their debt to US government/tax-payers by all necessary means such as cutting workforces, cutting benefits, limiting loss and working harder. If ECB/EU help troubled European sovereign states, will these countries ever repay the money or continue to roll over their debt? Will these countries increase tax and cut social benefits and make their people more competitive?


What's your opinion?

[tanjm]

2008 was a purely financial crises precipitated principally by a bubble. It did not involve real productive capacity except in so far as it affected confidence.

The European crisis has structural issues associated with it that are probably harder to solve.

[Muck]

My 2 cts...

The 2008 US crisis was never resolved, they've merely shifted it from pte hands to public hands. The Fed Reserve still holds us$900b in mortgage backed securities and agency backed debt as of last month. This alone is more than the Fed's total assets in aug2007, before the onset of the crisis.

At it's current debt to GDP levels, 15.8 trillion on a GDP of 15 trillion, the US is pretty much in the same league as some of the eurozone states. Tack on it's Medicare and pension liabilities and the similarities get closer closer. The difference for now is the US has a money printing press whereas the troubled states don't. I don't know when, but I believe the US may prob lose it's reserve currency status in my lifetime.

[camelking]

We are in an era of Poor countries with Rich corporations

Due to globlisation, corporations can source for cheapest inputs eg labour, sell to the entire world and pay the lowest taxes. Due to the democracy, countries have to provide for their citizens via social welfare.
As corporations shift from one country to another in search of cheapest labour, unemployment continues to rise. Countries are forced to 'feed" the people else the governments will be voted out. At the same time, a new middle class started to emerge in Asia which provide 'profits" for the corporations.

In order to keep unemployment down, countries turn to lowering of interest rates which further increase the profits of corporations.

Managing countries has never been more difficult in the history of mankind.

[RedRubySlippers]

Well.. from a strict investment / trading perspective, this current Euro crisis has hit my own bottom line far worse than even at the lowest of the 2008 early 2009 period.

Sentiment and interest has never been worse - the volumes on the trading floor in general are almost non-existent.

Part of the problem is that it's taken too long for countries and policy makers to get their act together. In the past, discounting the 'Depression', most crises / downturns last for a year? maybe 2? before 'things get better'. Its gone past that period now and people are starting to lose interest.. even the most optimistic of retail investors / value hunters.

its a very sad state of affairs now.

[tanjm]

Just because both involve debt, it does not mean they are fundamentally the same, though the GFC may have exacerbated the European situation or perhaps brought it forward.

Based on my readings, even if the ECB were free to throw money at the situation (which they aren't now as they are restricted in their mandate), it doesn't solve the fact that in the problem countries involved, you have citizens who feel they are entitled to evade taxes, get almost full pensions at 50/55/60 years of age, have a bloated civil service, or generally feel that they are owed something without working for it.

The US situation was a case of mispricing of assets. But in general, the US is a much more vital, hardworking, youthful and productive culture - they will pick themselves up.

[Muck]

I believe the problem is fundamentally the same - the govts in question owe more than they can collect in revenue. That's why my view is that there's substantial sovereign risk, even with the US (tho not as near term as the EU states). I agree the approaches in solving this though, will likely be different given the structural differences between the US and the troubled EU states.

[freedom]

I disagree that the problem is the same. To me, it is very different. One (financial crisis) you can expect that those financial institutions to repay the debt they owed to US government/tax-payers. The other(European Sovereign Debt Crisis), I have reasonable doubt that they will ever repay their debt. Even in US, it is very different. Although US is running a budget deficit, the government is more fiscally responsible than those European sovereign states. US government can't just anyhow increase its government spending without approval from Congress. The US debt ceiling crisis does not empower US government to borrow more or run larger budget deficit, but giving US government opportunity to repay the debt they already incurred.

I am of the view that German is right on the solution of European debt crisis. They can't just let ECB/EU save those troubled countries without structural social changes. Those countries need to demonstrate that they are more fiscally responsible to manage its debt and they are willing to cut social benefit if necessary and make themselves competitive.

[corydorus]

For Euro, Germans block it. If thing come to a worst, and Germany enter recession and their own people starts to lose jobs, i doubt why Euro Printing is not favorable to them. If they are stubborn being right, Euro will break.

If Euro prints, no Crisis in the end ?

1. Chance of High Inflation. Euro is not a trading currency.
2. Addiction to Printing. One country prints, all the others help to bear. Debts will continue to grow.

Gov bonds yield can dramatically worsen. Why not Euro bond ? It will just buy time, and then implodes.
I won't be far from USD. Unfortunately i am not in Europe to profit from it.

Cory

[Muck]

Ok, I guess I could have been clearer. The problems of pte financial institutions was averted and they will have to pay back. I agree they will find the means to pay back. When I said the crisis was never over, I mean that the toxic assets still exist. It's being held by the Fed. It adds to what I believe is significant sovereign risk. What debt ceiling? The so called ceiling has been raised 74 times since 1962. Something's gonna give, and I believe it will be in my lifetime. This is of course all opinion only