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The Loop of Global Financial Crisis: Will 2021 Be The Same?


Rewind Global Financial Crisis: 2021 Recession in 5 Minutes Infographic (Part II)

In 2020, a widespread pandemic has shocked the global economy. Countries go into lockdown, 3 trillion USD lost in GDP and the world officially step in a short recession after growing negative in first half of 2020. But are we on the verge of another financial crisis?


25 tháng 7, 2021


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In 2020, a widespread pandemic has shocked the global economy. Countries go into lockdown, 3 trillion USD lost in GDP and the world officially step in a short recession after growing negative in first half of 2020. But are we on the verge of another financial crisis?

Looking back at thirteen years ago, the collapse of Lehman Brothers became the signal event of an unforgettable crisis. The day after Lehman Brothers filed for bankruptcies on September 15, 2008, the Fed had to hand a bailout of about 150 billion USD for the banking system. A few weeks later, Congress passed the Trouble Asset Relief Program, which allocated another 700 billion to stabilize the financial system. But the Lehman fall still cause inevitable financial crisis and 10 trillion USD lost in global economic output.

Back to the beginning of 2000s after the impact of the Dot Com bubble, the Fed have to continuously lower its benchmark interest rate to encourage lending practices, and revive the U.S economy. But that proved to play a large role in the run up to the financial crisis.

As FED fund rate drop quickly, borrowing, and personal loan become cheap, and attractive as ever. At that moment, U.S housing is the most attractive investment as it is the only investment to escape capital gains with the Taxpayer Relief Act.

Housing loan from bank increase 3 times fold, aligned with the decline of FED rate during 2000 to 2004. Easy lending in this segment has incentive banks like Lehman Brothers and other financial firms to finance for a group of loan that we later known as subprime mortgages.

For the reason to prefer so much home loans, many bank managements argue is that there was confidence in market that no matter how high price go, there would be an opportunity to sell higher price, given steady increase in demand for a long time, so mortgage was considered a strong backed asset for any related loans.

The significant drop in FED also pushed US economy in overheat state, with a record of 8% growth rate in 2003 quarterly growth. The FED soon realize their mistake in letting policy rate become too easy, and quickly adjust up the benchmark rate to reduce the economic risk.

This is when debatable opinion arises. Although the purpose of hawking rate after 2004 is to cease the overheated economy and draw people away from risky loans, it has indirectly causing too much pressure for homeowners as they are hard hit with rising borrowing cost and lower income due to slower economic growth in a short period. Rising rate also mean higher yield for financial asset, thus also pulled people money out of manufacturing into stock, bonds and some of the important contributor to the crisis: mortgage backed security (MBS).

In short explanation, mortgage-backed security gathers hundred of the home loans into a tradable security for investors, create a way to trade multiple mortgage based on so called, investor value. And despite of Alan Greenspan warning sign in the housing market, price of this security was pushed up sky high, giving much paper return for its investor. In the later research paper of FED, it shows up that housing finance companies like Fannie Mae and Freddie Mac, investment bank like Lehman brothers and other hedge funds are the biggest buyers of this financial product.

Bubble in the investment asset and a systematic default in the bank loan eventually caused the inevitable financial crisis. After the break down of the powerful green dollar, other countries also suffered from the mass withdrawal of global foreign investment in the later years.

12 years later, we did greatly recover from the financial crisis after a bunch of stimuluses from central banks and lot of effort to rebuild fallen industries. But analyst is predicting for another economic crisis after the short recession in 2020. So how close are we. Let's compare the current situation with 2008.

The 2008 global crisis has been cumulated by a period of 6 years growth in the asset bubble, counted from the first recovery of the economy in 2002 with the meltdown in the inner financial system then spread out to the manufacturing sector. This year crisis has a longer period of 10 years cumulative, only to disrupt by the effect of an external force, the coronavirus, which cause manufacturing to shutdown, but the financial system still working fluently.

Scale is also different between the two recessions. In the 2008 recession to, global GDP decline by 1.67%, and the US government spent a total of 2.8 trillion USD in 3 years to handle the financial crisis. But in 2020 crisis, those package worth 2.2 trillion bailout to save the economy has been spent is just months, with global GDP decline 3.6%.

If the number speak the truth, then we have gone through a far worse recession the the last one did. There is only one thing, the recession have yet to result in a crisis or any bubble burst this time. Then why, isn't there any bubble to burst?

Actually, there has already been some financial threats and asset bubble, but it is unclear how and when it would burst. First one this the global debt number, which has reach 280 trillion USD in 2020, up 12% YoY and stood at all time high, equal to 355% of global GDP. And the U.S is currently the biggest debtor.

Second is the overheat situation in some economies. As many countries goes into lockdown, the manufacturing industry have to bear all of the consumer needs and lead to shortage from medicine to container, semiconductor, causing higher price of goods and a risk to inflation. China is the big example.

Third sign is coming from price bubble in some commodities, financial asset, which go up relentlessly regardless of the recession and many investors saw this as a speculation opportunity. Steel, gold and silver price has gone up almost 30% since the beginning of 2020, oil up 20%, coal up 80% and soft commodities like wheat up 40%. Also, the most thing we concerned about is the bubble in the U.S tech market, the housing market and the cryptocurrencies market.

And the only reason why people have not name it a crisis, is because it has not related to the burst of the stock market. Remember in every previous event that was named crisis, the stock market has to decline 20 – 40% to make the market panic enough to recognize it. And maybe, at this moment, we will have to wait for some months or years before it actually, well, burst. What do you think about the current situation. Let us know in the comment.

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