The massive financial earthquake brought about by the subprime mortgage debacle is still producing large aftershocks around the globe and today was one of the biggest.
For sure, at first glance, it would appear as if the trigger for today’s dramatic–though temporary–drop of the Dow for a brief period of 998.5 points (its biggest ever point drop within a day), had nothing to do with the mess the U.S. started back in 2008 with the bursting housing bubble, which sparked what is now called the Great Recession.
Rather, troubles in Greece and worries about other Euro zone nations that are debt ridden (not to mention the very non-Euro zone, yet still debt ridden U.K.), combined with what appears to be a trading glitch of some sort, seem to have produced a perfect storm that caused the market to drop faster than a Sears promotional sale.
The market did bounce back, though not fully, and nerves were left somewhat shattered.
Now, I said that it would not appear at first glance that the housing market disaster had anything to do with this…but it did.
We keep hearing how interconnected our financial world is—but that connection is one that spans not only space but time.
The subprime caused disaster (and it was certainly that) set the stage for all that has followed (and will follow) since: The Great Recession was not confined to U.S. borders and we are now seeing how many other nations are really being impacted.
Greece, which spent like there was no tomorrow–and is now finding out there may be no tomorrow for real–is as much a victim of questionable bank deals and mortgage backed securities, as anyone on Main Street, U.S.A.
The U.K. is in such dire financial shape, voters there appear to have given the current Labour government a vote of no confidence, though Prime Minister Gordon Brown may manage to cling to power in a coalition Parliament. Maybe. The housing market collapse is a prime cause of Britain’s current problems.
Closer to home, even if it was a glitch (or broker’s mistake) that caused, at one point, one Dow company (Proctor & Gamble) to seemingly loose close to 40 percent of its value in about five minutes before recovering, the fact that so many investors could so quickly assume the worst is evidence that we are all still shell shocked and flinch too easily in the face of what should have been obviously faulty trades of some sort.
In recent weeks, we have been punch drunk. Or, at least, some have. The market has been on an upswing–people ignoring that many expect (and still do) a ten percent correction at some point soon.
And, we keep reading about how company A or company B is doing much better than this time last year.
But today proved we are still fragile. We are still vulnerable.
No, the economic plates that collided to produce the Great Recession have not yet fully settled.
We don’t know where the next aftershock will come from or when. But it will come.
It is not over yet!