It may be painful, but go back in your mind to 2008. There was great uncertainty in the financial markets and in the banking industry. Trust was gone. Overvalued toxic assets were ruining balance sheets and investor confidence. Then the Federal Reserve Board announce its $700 billion TARP, which was suppose to make everything better.
Yet, doubt and fear prevailed and the U.S. economy sank into the Great Recession.
It that happening in Europe now? The parallels are certainly there. Banks are not trusting each other and there are a lot of toxic assets in the form of government bonds issued by nations that may have to default on their obligations.
The IMF is set to pump in 600 billion in order to calm fears and provide necessary liquidity. Will it be enough or are we kidding ourselves (again)?
First, the liquidity in the banking system is essential and absolutely necessary and that sometimes means intervention is necessary (my pardons to my strict Austrian Economics friends). Second, it is different this time than it was in the U.S. in 2008.
Here is why.
1. Prices have already corrected both in the stock market and in many residential markets. This was not the case in the US in the first half of 2008.
2. There is the U.S. as the perceived "safe haven." This was decidedly not the case in 2008.
3. Individual and professional investors are already wary of these issues. These same folks blindly walked into the liquidity trap of 2008. The awareness means placement of capital today is more conservative and therefore protected.
4 .Businesses on both sides of the Atlantic have reduced their exposure. Businesses before 2008 were flying high in terms of hiring, expansion, and inventory in light of anticipated demand. There is little of that left Firms are profitable and have right sized, and because of this we would not expect any major downsizing efforts to occur should the European economy continue to deteriorate.
5. Lastly, there is a move to frugality at the national level that was missing in 2008. This is obviously not the case in the US, but it is the case in Europe. The move toward balanced budgets and plans to reduce sovereign debt may ease a lot of angst as the months roll buy.
Expect a slowdown in Europe, but it is not likely to be anything like the 2008-09 recession in the U.S.