Executive Summary

• The Fed's inability to recognize the true dynamics of the 2008 crisis has re-inflated a market bubble and unfairly rewarded the big banks
• More credit/liquidity cannot solve valuation/collateral crises. But that's exactly what central banks are trying to do.
• How the Crisis of 2014/2015 will differ from 2008
• Why this time, the Fed's fixes will be futile

If you have not yet read Why 2014 Is Beginning to Look A Lot Like 2008, available free to all readers, please click here to read it first.

In Part 1, we noted the similarities between early 2008 and 2014, and dismantled Alan Greenspan’s claim that the global meltdown of 2008 was unforeseeable. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.

After reviewing some technical charts that suggest trouble ahead in 2014 (or perhaps 2015 if certain cycles hold up), I asked how asset bubbles can be considered a “social good” if the current bubble is not boosting employment or income for the vast majority of Americans. I also wondered how the presumed fundamentals of “growth” (sales, profits, creditworthiness, etc.) can continue expanding if income is stagnating.

In Part 2 of this report, the goal is to examine the policies of the states (central governments) and central banks around the world that have boosted assets such as stocks, bonds and real estate to new highs. What repercussions are they creating, why they are failing, and why they will cause a crisis that will be as damaging as 2008 — yet unfold quite differently.

Fighting the Wrong Battles

My primary thesis is this: the central banks’ initial response to the domino-like effect of subprime mortgages imploding was based on the assumption that the crisis of 2008 was a conventional liquidity crisis that could be resolved by making short-term credit (liquidity) available to temporarily stressed lenders and banks.

But when increasing liquidity failed most spectacularly to stop the meltdown, the Federal Reserve realized that the real problem was not a lack of liquidity but a collateral or valuation crisis: assets no longer had a market value to support the loans and derivatives that had been piled on the assets.  The collateral underlying a mountain of credit was impaired or even phantom.