Our planet had a close call with financial fate in the fall of 2008. The dominoes began to fall as nontransparent hedge funds rejected redemption requests and aggressively yielding money funds were about to do the same. As investors' emotions switched from greed to fear, a classic run on the alternative and shadow banking system began. Some of the most savvy were transferring bank balances to Treasuries only. Complacency had suddenly become concern, and capitulation soon followed. We had a financial panic, the worst in 70-some years. The banking system froze and deleveraging ensued, bringing on a deflationary adjustment in almost all classes of global assets, with the exception of the highest quality of liquidity.
Government financial intervention became the most aggressive in modern times. Liquidity, low interest rates, purchases of doubtful debt, cash to consumers, incentives to buy cars and homes, anything that might slow the speed of the falling dominoes was attempted. Less bad was soon seen as better than more bad. Liquidity went mostly into the financial markets, into stocks and all levels of bonds, from the government's short-term debt to corporate junk paper. With direct correlation, most of the global financial markets had a significant rebound. The intervention appeared to be successful for the time being.
Now we have what many are describing as a new normal. It's become a different world with higher unemployment, ...