According to one bearish financial analyst, everything the Federal Reserve did to fight the 2008 market crash is about to cause a worse one.
In an episode of the RT financial broadcast “The Keiser Report” Thursday, Max Keiser said a financial market crash is near. Meanwhile, S&P 500 executives will be hiding out in the hills with their ill-gotten gains, waiting for it to blow over.
Above all, Kaiser points to the Federal Reserve’s ever growing balance sheet before and since the 2008 financial crisis as the cause of the looming market crash:
It’s a recurring theme: Everything can be solved with money printing.
The end result is a drastic misallocation of capital resources to unproductive risk assets like WeWork shares and a record high consumer credit bubble. When the economy adjusts to the actual value of these malinvestments, there’s a blistering market crash.
Keiser says the insanity of monetary stimulus is evident in the coronavirus rate cut.
These policymakers have grown accustomed to the idea that every single problem can be solved with money printing. Why can’t we solve the coronavirus with money printing? The market now is starting to scratch its head a little bit and say wait a minute, that’s insane.
But the acknowledgement will come too late to save trillions in destroyed capital.
So therefore valuations look like they’re going to be marked down. Already in correction territory in these markets down ten percent. Are we going to get to bear market valuations? Down 20%? Probably. I think the likelihood is extremely high.
Over the past couple of weeks we’ve had an enormous purging of CEOs. If you look at these S&P 500 companies, there are an enormous amount of CEOs who have retired, like Bob Iger at Disney, and a bunch of others. Because they’re totally vested. They’re running away with all the money now. They realize the end is upon us. And they’re just running for the hills now.
But he believes this global market crash has grown out of what happened in 2008:
This is Part Two of the global financial crisis that started in 2008.
There is also a broad consensus about the causes of the 2008 financial crisis and resulting global market crash. As then Federal Reserve Chair Ben Bernanke told the Financial Crisis Inquiry Commission in 2010, the most prominent cause was “significant losses on residential mortgage loans to subprime borrowers.”
The housing market crash spilled over into a banking crisis because of the securitization of mortgages. Lenders bundled high risk mortgages together as investments to sell to other banks. In 2011 the commission referenced above concluded the causes were:
Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk;
An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis;
But banks took these risks as a result of the Federal Reserve’s monetary expansion. Susan Wachter of the University of Pennsylvania’s Wharton School of Business says “a huge expansion in the money supply” caused the housing bubble.
Further, from 2000 to 2003, the Fed lowered interest rates from 6.5% to 1%. A 2018 study by MIT, the University of Chicago and Harvard found that individuals “have a greater appetite for risk taking when interest rates are low.”
To fight the financial crisis, the Fed more than quadrupled the money supply in just six years. It was an unprecedented, radical monetary experiment. And it was an extreme version of what caused the global market crash in 2008 to begin with.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
This article was edited by Sam Bourgi.