What’s different about 2008?

I am on record for expecting a serious downturn after the Tech Bubble crashed in 2001. We muddled through for a few years, but ultimately most of the damage was done and gone by 2004. The Tech Bubble was a bubble of asset prices that had little influence on the underlying global financial system. Its crash did have a significant impact on capital spending and corporate deleveraging but the financial system was left pretty much intact, especially after aggressive policy moves by America’s central bank.

This recession will be much more difficult in large part because the housing bubble is in essence a credit bubble. In fact, housing prices will not be the only assets to crash in this bubble. Leveraged loans, credit card-backed securities, auto loan-backed asset securities and high yield bonds are a few asset prices that have suffered and will suffer more before the deleveraging is over. The difference between this business cycle and last is debt. When banks must write off huge sums of bad debts, it goes to the core of any economy. And the U.S. has been very dependent on rising debt levels to sustain adequate economic growth since the bull market began in 1982.

Therefore, as the recession takes hold, financial institutions will need to de-leverage to remain healthy and will be unable to lend. This is going to have major repercussions on a U.S. and global economy that is hooked on the overly-indebted U.S. consumer.