From 08 to 20: In the Eye of Storm | A Macroecon Analysis

        It’s a long essay. I suggest you to mark it down and read it by sections over multiple nights or for some time. I wrote this essay in March; backed up by a lot of data and fact. I try to make it easy.

At the centre of the storm | Source:Chief Executive Magazine

– why 2008 financial crisis happened: the underestimated systematic risk-

The 2008 financial crisis is essentially a US dollar liquidity crisis, which stems from the explosive subprime mortgage market. 

Since the Dot-Com Bubble in 2001, the US entered into a long period of low inflation. Central banks around the globe prided on their bountiful toolkits. They were able to successfully manage most of the ebbs and flows in the market. From the 80s to mid-2000s, developed countries followed such smooth pattern; we call this period the Great Moderation. Before the financial crisis, regulators had been numbed by the peace. 

Because of the low interest rate and a relatively eased lending environment, consumers began taking mortgaging for their assets by the merit of subprime loans, many of which would have been bad loans in a tighter environment. Banks lent freely. Investment banks and some financial institutions then repackaged these mortgage-backed securities (MBS) into three tranches by the order of debt-clearing possibility. Then, financial institutions sold these risky securities to their investors, which include bigger financial institutions such as the pension funds and other wealthy individuals. Preceding 2008, Freddie Mac and Fannie Mae, the biggest US government sponsored enterprises (GSEs) in residential real estate, amassed sizeable MBSs, which can easily wipe out the entire portfolio in down time. By the end of 2005, Freddie Mac had $15.98 trillion MBS, and Fannie Mae housed $9.74 trillion. 

Revenue of Freddie Mac and Fannie Mae on a $5-billion bar |Source:Investopedia

            The canny investment banks did not bare risks themselves. Investment banks knew that the risks were unprecedented, so they ensured themselves by buying insurances from the insurance companies. Risks effectively flowed down to insurers.Because of the financial insurance, banks sold even more MBSs and other complex hybrid instruments. The moral hazards issues, i.e., for banks to do riskier things that they otherwise wouldn’t without safety net, were a key reason of misconduct. Big insurers entered the game as well. In late 80s and early 90s, some British insurers had already suffered huge losses in financial insurance1. Unfortunately, the Wall Street did not learn. The traditional life insurance market and asset insurance market were approaching saturation. To expand their lines of service, insurers had to ensure financial instruments. Before and during crisis, financial institutions even designed the more subtle credit default swaps (CDSs), sending the risks further to every nook and cranny in financial market. Two parties entering in CDS can “swap” the risks of their products based on the possibility of a certain matter. Prior to 2008, CDS was considered the “offmarket”, making it less regulated than normal insurance. The overuse of CDSs is another key reason of financial crisis. 

            Lastly, institutional investors such as pension funds were why the 2008 financial crisis left a mark in history. Pension funds, by their name, are about pensions and welfare. It is okay for pension funds to not yield return, but it is not okay for them to lose the deposits (pensions) during financial crisis. Without pensions, how can elderly survive (especially when Baby-boomers were already pressuring the US pension market)?2In the past hundreds of years since the coronation of capitalism, there were dozens of financial crises in developed liberal markets. It wasn’t that those crises were not important, but because most of them did not significantly squeeze welfare of consumers. Hence, their infamy only confined in the financial industry. The 2008 financial crisis still haunted every news-reader because it was one of the storms that raided then US financial market, crumbled the US real economy, and hammered the world through international trade.   

            Many other reasons also contributed to the unpacking of pandora’s box. Ex-ante financial regulations were relatively loose. Banks also rewarded their managements by “returns”, resulting executive boards to eye returns only and forgot risks. Credit-rating agencies (Moody’s, S&P, Fitch) watered their ratings on MBSs, so consumers innocently bought assets by grades. As the deepening globalisation, improved technology, strengthened global connection in finance, the US dollar liquidity crisis finally emerged to become a global USD liquidity crisis, global financial crisis, and global economic storm. 

The US housing price fell from the 2006 peak |Source:Economichelp

– Before the storm: the miscalculated US government

       Before 2008, the subprime market already showed signs of downturn. In the latter half of 2006, the once soaring US housing price began winding down. Because of the revise housing price, subprime mortgage borrowers started to realise that they could not afford the debt. Homeowners defaulted. Abided by the MBS contracts, banks temporarily took ownership of homeowners’ houses to service the debt. As banks held more illiquid houses in hands, it drained their cash ability. In the meantime, price of real estates dropped, causing a further shrink on the value of banks’ houses. Large-scale of homeowners’ default and reversing housing price trapped a few small institutions. It wasn’t because banks had no value in their assets, but their assets could not liquidate into cash. Some mutual funds and pensions funds on the same string were also troubled. The “privileged” government-sponsored Freddie Mac and Fannie Mae had long borrowed to the hilt by a special low interest rate. In 2007, the two firms’ posted record-high losses, the majority of which came from subprime assets

         The US government overheard, but its reactions were not enough. 

The last straw was the downfall of Lehman Brothers.In 2007, Lehman Brothers, the then fourth-biggest investment bank with hundreds of years of history, showed signs of danger in subprime market. It had to close its subprime business unit, BNC Mortgage, the same year. Similar to the above-mentioned financial institutions, Lehman Brothers also owned many real estates but not enough cash. In the first half of 2008, 73% of Lehman Brothers’ stock value vanished. On the 13thof September 2008, the Fed of New York held meeting to discuss the case of Lehman Brothers. The meeting proposed a “liquidity plan” to potentially help Lehman Brothers. Nevertheless, the government decided to not intervene.4

          On the 15thof September 2008, Lehman Brother declared bankruptcy. On the same day, credit market tightened almost over seconds. Down Jones Index dropped for 500 points, losing 4.4% in one day (ironically, the drop of Lehman Brother’s day does not event chart top ten of Dow’s fall in one day. The losses in March 2020 are among the top). 

          Afterwards, the US and global institutions faltered. Institutions restructured their MBS units. History declared the onset of global economic crisis.  

Lehman Brothers to be auctioned |Source:Business Insider

Liberal market economy (LME) and coordinated market economy (CME) –

Before further analysis, I want to raise attentions to the difference and similarity of liberal market economy (LME)and coordinated market economy (CME). I think how different countries brave the storm of crises are due to the divergence of LME and CME. 

In 2001, Peter Hall published Varieties of Capitalism, in which Hall categorised developed capitalist countries into two mains: liberal market economy and coordinated market economy. The UK and the US represent the former and Germany represents the latter. 

In LME, financial industry is more developed. If people need business capital, they tend to raise funds in public market, which is true in reality. The British and American debt and equity market is highly developed, blessing the entrepreneurs and firms with ample chances for capital. Hence, the British and American creativity tend to be relatively higher as capital for trial is easier. However, in LME, regulation (especially on financial market) is relatively loose. This is also why LME’s financial market is apt. LMEs place business profits above employee’s welfare. During financial crises, firms lose profits so many choose to cut costs and lay off employees. 

In CME, business capital tends to be funded in private market through bank loans, community funds, or family supports. The CME’s regulation is stricter. Firm’s valuation has limited upside. While the 2008 financial crisis was fully blown in the US and the overvalued US market revised, the financial bubbles in German’s real economy were not as great. In CME, welfare was essential and many employees had guaranteed employment. Even during economic downturn, firms could not fire as they wished. 

Knowing the distinction of LME and CME gives us a clearer plotline for analysis of financial crisis. 

From left to right are the then head of Treasury Paulson, then head of the Fed Bernanke, and the then head of NY Fed, Geithner | Source:Wall Street Journal

From left to right are the then head of Treasury Paulson, then head of the Fed Bernanke, and the then head of NY Fed, Geithner | Source:Wall Street Journal

 Crisis solutionglobal money-printing, mad bank stocks, a decade of bull market, and the punching macro regulation

            By the time Lehman Brothers filed bankruptcy, the global financial crisis had already unwrapped. We can swing our attentions to a bit earlier to the UK, the brother of the US in the financial market. In 2007, Northern Rock had already sought help from the Bank of England. It plead the Bank of England to intervene as the lender of last resort (LOLR). Only in 2008, the British government agreed to nationalise Northern Rock. 

            The subprime crisis squeezed pennies in the entire financial market, meaning that LME firms reliant on public market for business capital lost their source of funding.Productivity dropped for 13%, of which 3.5% came from drying of business capital. Firms could not refinance and had to pay back their current debts. Smalls firms were at the brink of disappearing and big firms, facing flying credit spread, witnessed their revenues halved or wiped. When LME firms faced profit decline, they chose to fire employees. In 2008-2010, 8.7 million US jobs were erased with a snap. From the usual 4.7%, unemployment rocketed to 10% in October 2019. The only positive thing that birthed out of this crisis is the quality of the remaining employees. Nevertheless, massive unemployment hampered the growth of firms. Besides, many had already lost their houses in the previous subprime mortgage crisis. Although many jobseekers found new jobs in 2009 after the economy began reviving, many had suffered from structural unemployment. 

            The US central bank reacted swiftly in crisis and injected liquidity into the market. The first in the toolkits was quantitative easing (QE). The set of interventions through open market operation is money printing. On the 25thof November, 2008, the Federal Open Market Committee announced the first round of QE1, which bought $600 billion T-Bills and worked on the most liquid M1 (cash, cheques, and short-term bills). Later, the Fed injected much more liquidity into the market by phases. At the beginning of 2010, the government added $175 million MBSs from Freddie Mac and Fannie Mae on its balance sheet. QE1 ended around March, 2010. Because the series of operations had been successful, the US economy revived in 2009. In all, the US central bank injected $2 trillion liquidity in the market through its 4-time QE. 

            Besides, the Fed lowered interest and mortgage rate, effectively alleviating stress from individual or institutional debtors. The Fed purchased the poisonous MBS and removed it from the balance sheet of banks and GSEs. This also regulated the MBS market. The round of QE also indirectly expanded the balance sheet of the government, which used fiscal policy to directly stimulate the economy. In the meantime, the government bailed out troubled firms and helped negotiate restructuring and facilitate merger and acquisitions of troubled firms by bigger banks. In 2009, the Obama administration and Congress passed the $787 billion American Recovery and Reinvestment Act. $75 billions of these funds were direct funds aimed at helping the deeply indebted homeowners. In 2012, most of the MBSs purchased by the US government profited positive. High-quality MBSs even regained position as an important revenue source for banks. Unemployment returned to 4.7%. Despite of the unprecedented money-printing and monetary expansion, there wasn’t serious inflation in the US. 

            However, no policy is perfect. Much of this “liquidity” streamed into the banking industry. To make more profits from the crisis, banks retained the added cash in their own safer instead of lending out (retail banks profit from the interests by lending out deposit). Banks then pushed their stock price to a higher level by dividends and share repurchase. 2009 has been the most profitable year for banks. For example, the stock price of J.P. Morgan landed in the $48 realm on 2008. In 2019 at the end of the decade of bull market, its share price rocketed to around $139. The hedge fund heavyweight, David Tepper of Appaloosa, smelled cash and bought sizeable bank securities at the beginning of QE policies. In 2009, Tepper’s fund bought the embattled Bank of American (BoA) by $3/share, making $7 billion per year. The reviving banking stocks made Tepper a $4-billion wage in 2009. 

        David Tepper | Source: Bloomberg

            In the meantime, the increasing liquidity made consumers’ pockets “seemingly big”. Standard and Poor 500 touched the bottom in March 2009. Then, the stocks rose for ten years. By the 2016 presidential election, the stock was in a sprint and then into an overvaluation period. The new Trump administration proposed tax cut, fuelling the bull. By 2018, S&P 500 quadrupled relative to the former decade. The bull market coincided with the QE phases.5

            Before the crisis, regulation focused on micro-prudential, which was the regulation on individual banks. If one bank had bank run risk, regulators tended to contain the risk within the bank. Internationally, the Basel Committee also established a series of standard on deposit rate, etc (notice, the Basel standard is only a commonly used standard by not a mandatory rule). Nevertheless, in LMEs like the US or the UK, financial regulation was still relatively at ease. Before 2008, most of the financial crises impacted only the “micro” level of financial institutions (except for the 1929 Great Depression). After the 70s, the rise of hedge funds complicated the regulation matter. Highly leveraged and nimble, hedge funds belonged to the “shadow banks” that were not banks hence not regulated. However, these institutions had lots of money. The out-of-radar “shadow banks” were another reason why the financial system crashed in 2008. The 2008 financial crisis was a systematic crash. The risks spread from GSEs to investment banks to retail banks to insurance companies to credit rating agencies. The systematic meltdown awakened the regulators and let them see the inappropriateness of the financial system and risk in the regulation. Regulators decided to upgrade their rules. Macro-prudentialwas born. 

            Macro-pru in the US is the most famous for the Dodd Frank Act.6The Act levelled up the US supervision on the financial industry and especially on derivatives. It technically prevented banks from doing highly risky and leveraged businesses. The subsection Volcker Rule explicitly banned proprietary trading, which zeroed out any possibility for banks to use deposits to trade. Once one of the most profitable department, prop trading phased out in history for good7. The Dodd Frank Act also established the Consumer Financial Protection Bureau (CFPB) to educate consumers and better protect them. Greed had been a major reason why the 2008 crisis happened. However, another reason is that consumers lack the “financial intelligence”, being tricked by the complex clauses of bank contracts.

            In the other parts of the world, similar regulation and supervision also increased the oversight of “macro-pru”. For example, the Bank of England consolidated the earlier regulation departments and made the two departments to stand out in the “twin-peaks” system. The first is the Financial Conduct Authority (FCA) to better protect consumers. The second is the Prudential Regulation Authority (PRA) to focus on the macro-pru regulation. 

Currencies of the first and second largest economy |Source: The Straits Time

– US Dollar en march: The “spill-overed” global currency –

Accounted for the world’s 61.9% liquidity, US dollar is the number one reserve currency8. More than half of the US dollars are in hands of non-American institutions and individuals. When the US dollar was deeply in crisis, global central banks also pumped out USD-related liquidity. Nevertheless, such “improvement” on USD liquidity was only a relative term for economic bodies within the US zone. For many parts in the world such as the Latin Americas and China, there was an oversupply of USD that caused overheat of economy during recovery.9

US dollars depreciate during wars. In most of the crises, whether big or small, US dollar appreciates. When the US dollar appreciates, global currencies depreciate relatively.In 2008, global funds flocked into the “safest” asset – US Treasury bills, pushing the US dollar to high. European institutions also (over) hedged against USD-priced assets, sending the USD appreciation higher. 

I think many people neglect the absolute strength of US dollars when analysing the macro situation. The absolute strength of US dollar is not only a currency matter, but also an important issue for trades and commodities.

Rocketed real estate price of first-tier cities in China |Source: Bloomberg

– The challenge and opportunities of China in 2008 –

        By 2011, the Chinese MBS counted for Renminbi 6.6 trillion (roughly $940 billion) at a growth rate of 14.8%. Although MBS hadn’t resulted the systematic meltdown such as in the US, Chinese regulators had been very alerted to monitor this asset. In addition, control of the flying housing price has been a national policy for years. 

        The 2008 economic crisis double-killed the other Asian country Japan, which possessed both the LME characteristics of open market and the Asian classic of growth-led economy. The Japanese economy had just showed signs for warming after decades of sluggishness. The crisis turned its growth rate to negative. In China, the biggest contributing factor was the plummet of export demand. 

        The Chinese financial market wasn’t closely connected to the world due to its rather secluded policy. The mainland financial market did not suffer tremendously from the global shakeup. However, the Chinese stock market saw consecutive falls for days due to the failure of the exports. 

        In the first half of 2008, the Chinese economic growth was double-digit. By the latter half, the Chinese economic growth turned negative (ultimately going to negative double-digit by 2009). Manufacturing factories along the coastline shut down, creating a massive wave of unemployment. 

        The government led by premiere Wen Jiabao proposed the “Four Trillion” incentive plan in November 2008 to directly stimulate the economy. 

        The policy has been successful to some degrees. The Chinese economy recovered gradually. However, the “medicine” had been too strong for the economy. As the real economy recovered and labour market revived, there was massive oversupply of both currency and certain industrial products. Industries such as steel, long been criticised for its inefficient over-production, became more heated. The US dollars “spillovered” to emerging markets, sending the Chinese economy to the summer season in 2010 and 2011. 

        Local governments hoarding the newly released currencies had nowhere to spend but developing infrastructure to boost the “economic growth” figures. Economic growth did revive, but the actual needs of more welfare never met the promise (ironically for an acclaimed socialist country). Most of the oversupply of currencies then flew into the real estate market, creating multiple “housing kings” in the past several years. 

The landslide Brent oil on 9th of March | Source: Bloomberg

– 2020: History repeating, a story of same same but different –

Because of coronavirus and various other reasons, global assets crashed in March 2020. Not a single asset could avoid the slump. I think there are fundamentally different reasons and phases behind the recession. 

Coronavirus embraced the full explosion in China by the end of December, sending a strong blow of the Chinese economy. The virus spread to the world in March, becoming the biggest black swan in 2020 and a watershed event on human history. 

The US stock market had already started falling by February end, entering into the revaluation period. Black swan landed in the financial market on the 8th of March when Saudi suddenly declared increase of oil productionand entered into the price war with Russia. Upon reception of the news, the US oil lost 34% of the its previous value. Brent oil crashed by 31% in seconds. The oil futures burned. Even without coronavirus, such volatility in the oil market can change stock market dramatically. On the same day, S&P 500 futures dropped for 4.4%, triggering trading curb. Oil tends to be “trended”. When it rises in long term, small dip in short term is not going to influence its upward trend. Vice versa. Because of this tremendous selling signal, analysts all shorted oil. I think this is the first phase of recession with the reason of oil volatility.On the same day, VIX gushed for 16%. The safe asset gold rose above $1700. 

Shook by the oil market and hammered by the Coronavirus, the US stock began her persisting trade-curbs. On the 9thof March (Monday), all three of the US stock indicators, S&P 500, Dow Jones, and Nasdaq were dumped for 7%, setting off the first time of trade-curb among many subsequent drops. When the US stocks crashed, the world follows. The Stoxx 600 also shed the entire 2019 growth in one day. In the following 10 days, the US stocks had 4 times of trade curbs. The safe-heaven T-bill and gold also plummeted. The global stock market fell by 25%. For the more liberal and open G20 markets, many have free fall for 30%. This the second phase of crash. The fundamental reason is the impact of coronavirus on real economy and the vote of distrust on the current US administration on virus management. 

The fundamental reason of this crash is not liquidity, but the distrust vote on the current American administration’s antivirus effort and the struggling of the world’s biggest economy. Given the hyper-stressed US healthcare system, the US is under tremendous pressure on the health sector and other industries. At its worst in March, the world’s top three GDP bodies were all suffering, sending a formidable amount of fears to the market. When in wars, certain industries such as weaponry at least flourished. Coronavirus shut down most of the industries except for masks and online calls (and condoms and tissues). No real assets are present to back up the valuation of stocks. Besides, the previous valuation on the US stocks had already been overvalued. Technology stocks had become the “defensive” investment instead of the traditional high-risk assets. Stock rebound had an imminent nature, but Coronavirus turned the rebound into a landslide. Oil crash, virus, the faltering of the world’s top economies were all reasons building up the emotions. As Warren Buffet once said (from his experience in the 2008 crisis when he unfortunately missed calls to save Lehman Brother’s), every big American firm is a part of the dominos. If one big firm failed, there is a high chance for the chain dominos failure. Real economy’s challenge reflected on finance. That’s why the initial incentive plan proposed by the Fed had minimum positive receptions. The shrink of the financial market in turn diminished business capital, which further limited the real economy. 

The current US administration, pressed by reelection, squeezed by virus crisis | Source: ABC News

        Only until the Trump administration proposed the $2.1 trillion stimulus plan, the market cheered and reclaimed some lost grounds. Up to the article’s written date, the plan passed in Senate 96-0 and transferred to the House. $4.45 billion of the plan would be loans direct to businesses ($3.49 billions of which were for small-medium enterprises). $3.01 billion would be for individuals. $2.21 billions for tax delay. $2.50 billion for unemployment insurance. $290 million for airplane and shipping industry. For the classic LME country, the US, its domestic welfare system is relatively weaker than its peer developed countries. As mentioned before, economic downturn meant massive unemployment. I personally think the stimulus plan is rather a good call. If the plan can actually be executed as intended, it can help prevent the real economy from sliding further. In addition, the Fed also paired up the economic growth pill with the unlimited time zero interest policy and QE.10

         However, there are still too many uncertainties. Global central banks had been on the verge of liquidity trap, which left the central banks with limited selection of toolkits with zero interest. Without black swan incident, the US regulation can focus on pursuing the low inflation target and ensuring the vitality of financial industry by the strict stress testing. However, the volume of money-printing this time aggrandised, which for me seems like another distrust vote for the balance system of capitalism itself. Global money printing means American debts rise to another historical level, putting pressures on the already heavily indebted Americans. Considering the already serious aging problem in the US society, I think the policy pigeonholed problems to the next generation. Besides, the Sino-American “war” continues to brew. The US-China trade war occupied the headline in 2019. After the Coronavirus black swan, the US-China conflict will still be there. It will take time, and sometimes fundamental change of trade balance and other factors, to resolve the differences. I think the roots of this crisis is on real economy and the US healthcare system. To solve the issue at its root, the number one focus should be to eliminate the virus (assuming virus is an abnormal event instead of the new normality). Once the virus is gone, economy can gradually reposition. The obvious hurdle is that the development of antivirus vaccine is unpredictable in many ways. You never know when will the vaccine successfully emerge from the lab and pass human body test one day. Another way is that many industries adjust to the new normal and find ways to work from home. Adjusting to the new normality takes time. The second focus is to reshape the US healthcare system or even the entire system to ensure welfare for the less privileged. Next time when crisis hits, there will be less people caught in the unfavourable current of history and be structurally laid off. However, this sounds rather utopic unless Bernie Sanders becomes the president, which is already not happening in real life. Number three (although the least of all above) is to seriously monitor the vitality of the financial market, allowing the strength of finance to provide business capital to firms. The government has done considerable work on the third point. 

         While monetary stimulus seems a necessity in today’s market, I do not agree on excessive injection, especially for emerging market such as China. The core of economy has not altered, merely paused by the virus. Excessive monetary flush in addition to the spillover effect will certainly repeat the story in 2008, making the money to flow into assets like real estate. Excessive cash makes (bad) firms too easy to refinance, stirring bubbles. Bubbles in real estate in China, once crash, are going to shower the entire emerging market and the world with economic tsunami. 

        I also think you canny investors with some cash left can buy in good quality assets. Good assets never wear out through time. I do not think the so called “buying at the bottom” is necessary or meaningful in all regards. Buying is simple: you buy a good asset at a relatively undervalued or affordable price. At this particular moment, good assets are priced at a friendly level. For example, I personally long the banking industry again. I think the same way as Tepper in 2008. With the stricter regulation, banks that have not participated in highly risky activities are good buys. 

        As for all those you individuals, you may ask what can you do for the economy? Besides jostling many part-time remote jobs or trying to “innovate”, you should spend money given your budget. The world’s number first and number second economies cannot perfectly protect their low-income groups, who have suffered the most, in the crisis. Your little consumption at the breakfast stall down your building can directly save a family or small firm and indirectly salvage the economy.11 12


1.    I am mostly referring to the “Mortgage Indemnity Insurance (MII)” created by the British insurance companies in 80s and 90s. By MII clause, if the customer’s mortgage-backed assets depreciate, i.e., the customer cannot retrieve the debt, insurance companies would fill in the missed value. 

2.    Global pension funds, especially in the OECD countries, suffered great loss. The American pension funds netted an average return of -23%. Nevertheless, pension funds performed well in 2009 during recovery.

3.    The birth of GSEs such as Freddie Mac and Fannie Mae was meant to improve liquidity in real estate market. The US government wanted more Americans to be able to buy houses, realising their American dream of being “homeowners”. 

4.    It does not make sense to purely blame on the government for not bailing out companies. No one had foreseen the systematic breakdown. Prior to crisis, most of the businesses in American financial crises were profitable. The enormous loss came from the 1% tail risk in the subprime market. The then Treasurer Paulson and then Fed head Bernanke were unwilling to bailout companies easily. First of all, bailout companies using taxpayers’ money had been unpopular. Second, Paulson had taken over the bankrupted Bernstein earlier. He was named the “Bailout King” and wanted to get rid of the bad notion. Some scholars believed that had American government injected liquidity for Lehman Brothers promptly, the bankruptcy and subsequent crash would have not come. 

5.    Many scholars such as Bhar et al. (2015) points out that QE positively contributes the bull market in the US. Some other scholars such as Feldstein (2011) says that no evidence can show the connection between QE and bull market. The only overlap of the two is time. 

6.    Dodd Frank Act identified a few Systematically Important Financial Institutions (SIFIs), but also created new moral hazard. Because the importance of SIFIs to the entire economy, the government may choose to provide fund to save these companies without limit. With the insurance of the government, SIFIs can do risky things without worrying to fail. Nevertheless, I personally think the new moral hazard issues have a lesser extent and possibility to happen as the regulation post crisis has levelled up greatly.  

7.    Besides, banks have to do stress test periodically. In stress tests, banks have to simulate their reserve capability under adverse scenarios such as economic crisis or bank run. With the regular supervision on stress test, the likelihood for banks to have bank run decreases. 

8.    In comparison, Euros take 20.68% of the world’s trade flow, and British pounds and Japanese yens are only single digit percentage. Chinese renminbi takes 2.01% of the world’s transaction (IMF, January 2020). Renminbi became a reserve currency in 2016. 

9.    The US dollar appreciation changes the emerging economy in various levels. The relative depreciation of global currencies can sometimes stimulate export, but in another time burdens the economy (due to USD spillover). The USD appreciation helped Chinese economy’s recovery in 2009 and 2012, but overheats its economy in 2010 and 2011. 

10.  Keynesian economy has been the world’s staple since World War II. Although the initial advocate of Keynesianism (government’s intervention) is rather a wartime economy, policies in the past decades have retained the active role of government. 

11.  Until 11:30am, 30thof March, 2020, the US oil fell below $20 (Asian markets fell after hours as well). I think the world has a long way to go as long as oil keeps being sluggish. 

12. An acquaint of mine, who is also a Harvard phd in Economics, said in a casual note (not proved by scientific research, just a personal comment): since the Fed was willing to intervene, crashes in economic crisis have been great. Newly IPO’d companies since 2010 have been lacklustre in profit performance. He suspects that the real economy has never recovered in the past decade and it is only financial market overevaluating. Doing business does not make money. Investing money makes money. The next round crisis will be greater in magnitude. 

Further Reading: 

Investing Like A Fox – Angel Investing Knowhow with John Ason

Frederick Hayek: The Use of Knowledge

Soros on Soros


1.    Holcombe, Randall G. Housing America: Building Out of a Crisis. Routledge, 2017.

2.    Whitehouse, Edward. “Pensions During the Crisis: Impact on Retirement Income Systems and Policy Responses.” The Geneva Papers on Risk and Insurance – Issues and Practice, vol. 34, no. 4, 2009, pp. 536–547., doi:10.1057/gpp.2009.25.

3.    Kulikowski, Laura (August 22, 2007). “Lehman Brothers Amputates Mortgage Arm”. Retrieved March 18, 2008.

4.    Hall. Varieties of Capitalism. Oxford University Press.

5.    Hall, Robert. “Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis.” 2014, doi:10.3386/w20183.

6.    Chen, Qianying, et al. “Financial Crisis, US Unconventional Monetary Policy and International Spillovers.” Journal of International Money and Finance, vol. 67, 2016, pp. 62–81., doi:10.1016/j.jimonfin.2015.06.011.

7.    Mitchell, Lawrence E., and Arthur E. Wilmarth. The Panic of 2008: Causes, Consequences and Implications for Reform. Edward Elgar, 2010.

8.    Li, Zhiguo, and Xiaorong Zhang. “Evaluating the Effectiveness and Efficiency of the Four-Trillion Yuan Stimulus Package: Evidence from Stock Market Returns of Chinese Listed A Shares.” Global Economic Review, vol. 43, no. 4, 2014, pp. 381–407., doi:10.1080/1226508x.2014.982319.

9.    Hall, Robert E. “The Routes Into and Out of the Zero Lower Bound.” 2013,

10.  Feldstein, Martin. “Quantitative Easing and America’s Economic Rebound .” 24 Feb.2011,

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