The markets have been reacting to widespread unease over Europe's economic woes, and the oft-repeated concern that the "debt crisis" there will spark another "Lehman Brothers moment," initiating a new 2008-style calamity that will engulf the US and bring on another recession (or worse). Meanwhile, every economic report showing signs of slower growth is heralded as confirmation that such fears are about to come true.
We have written many times that we do not make our living by predicting ups and downs in the economy. That said, we believe these fears are overwrought and that investors would do well to take a skeptical view of comparisons in the financial media to the Lehman Brothers collapse of 2008. For a sober discussion of why the world is probably not on the brink of another "Lehman moment," we would recommend this recent article from retired economist (and prolific blogger and thinker) Scott Grannis, author of the "Calafia Beach Pundit" blog.
In that article, published last week, Mr. Grannis (referring to an article by Asia Times columnist David Goldman) notes that the significant differences between the problems in Europe today and the panic that brought down Lehman in 2008 are numerous. Most importantly, the panic in 2008 was over liabilities that nobody knew how to value, and whose losses had not happened yet (it was the fear of future losses that started the whole vicious circle), while the full extent of the liabilities and losses in Europe are well known, and have already occurred. As Mr. Grannis explains:
back then the market found it almost impossible to value the thousands of often obscure and arcane mortgage-backed securities that were tied to many millions of homes whose prices were tumbling at different rates all over the country. With the PIIGS crisis, we are dealing with only a handful of borrowers who have issued fairly straightforward debt securities.
We recommend all investors read the blog post by Mr. Grannis (linked above) and the article he links in that post.
