Five Years Later — The Impact of the Real Estate & Credit Collapse

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[You must be registered and logged in to see this image.]Five Years Later —

The Impact of the Real Estate & Credit Collapse

by D. R. Barton, Jr.

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In a society that is constantly hungry for news, the media happily provides it in all shapes and colors. This week, we will get plenty of reports on the five-year anniversary of the Lehman bankruptcy, which was the trigger for the largest drop in the 2008 financial market meltdown.

As usual, a lot of the reporting has been pabulum. But alas, I have stumbled upon a few resources that are quite insightful, including a cool graphic from The Economist and a staff research paper out of the Dallas Fed entitled “How Bad Was It? The Costs and Consequences of the 2007-2009 Financial Crisis” by Atkinson, et al.

In short, the bubble that burst ate up a significant amount of financial resources, albeit from a bubble-inflated level (no surprise there). But the magnitude of what happened is still surprising. Let’s dig in…

That Much? Really??

We’ll start with a chart from the Atkinson paper that shows graphically what most people already can intuit from the marketplace around them: this drop and slow recovery have both been much worse than previous cycles.

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Of note is that the black line (average) and the grey area (upper and lower extremes) only cover the recessions since 1960 (i.e. no Great Depression data). But it is striking that GDP has not recovered to pre-crisis levels, even more than 5 years later.

In addition, Mr. Atkinson and company do an in-depth analysis on the actual cost of the crisis. They break the effect into several components, starting with lost U.S. output. The authors estimate that between 6 and 14 trillion dollars, or 40%-90% of 2007 GDP was lost.

The research paper lists a large number of other less calculable costs including:

Unquantifiable cost of national trauma

Unintended consequences of government intervention

Cost of reduced wealth

The authors provide a very interesting (and alarming) chart showing the effect of reduced wealth on the purchase of nondurable goods.

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This reduced consumption could be linked to both reduced wealth and cutting back spending habits due to reduced future income expectations. But for whatever reason, this reduction in consumption is again worse than we’ve experienced as a nation during previous recessions.

The Economist also weighed in on the after-effects of the crisis with a pretty cool visual, which gives six distinct looks at before, during and after the crisis.

Based on our recent series on China’s woes, the changing bank landscape is a bit troubling. In 2007, the top Chinese banks were numbers 8 & 10 (based on Tier 1 capital). Now, China has four of the top 10 including numbers 1 & 5.

The second chart in the visual above gives an interesting perspective on the contraction in the large banks of Europe over the past five years and the growth in non-European, non-U.S. Banks.

Charts 3, 5, & 6 are pretty self-explanatory. Chart four is worth a mention because, by the measure of Tier 1 capital vs. risk-weighted assets, it seems that banks across the board have improved significantly. Whether this is enough to weather the next contraction remains to be seen.

As always, your thoughts and comments are welcome - please send them to drbarton “at” vantharp.com

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

Five Years Later — The Impact of the Real Estate & Credit Collapse

Five Years Later — The Impact of the Real Estate & Credit Collapse

Five Years Later — The Impact of the Real Estate & Credit Collapse :: Comments