Investment guru Warren Buffett confesses he learned from the 2008 economic crisis just how vulnerable the U.S. “economic machine” is to any one part failing.
Buffett told CNBC that he thought regulators did a “heroic” job in the immediate wake of the crisis, which started a decade ago this week.
The 2008 financial crisis is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.
The trouble began in 2007 with a crisis in the subprime mortgage market and evetually led to the collapse of investment bank Lehman Brothers on September 15, 2008 amid reckless risk-taking by Lehman and other banks.
Huge sums were invested in ultra-sophisticated — and opaque — financial instruments based on a lie: “subprime” mortgages that in a long era of very low interest rates allowed many people to purchase homes without regard for their ability to pay. But when the Fed began raising interest rates in 2004, the house of cards collapsed.
“What we all learned in that particular panic is that we’re all dominoes. And we’re all very close together,” Buffett said.
Buffett said many Americans were left flat-footed when the crisis hit. “All they knew is they did nothing wrong and their world was falling apart.”
Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was followed by a global economic downturn, the Great Recession.
But the economy has been recovering for 10 years, and the certainty is that there will be another crisis, AFP reported.
“So I don’t know which will cause the next crisis, but I’m fairly sure it’s not Dutch tulips… and not subprime mortgages,” said Aaron Klein, an expert on regulations at the Brookings Institution.
And political risk expert Ian Bremmer of the Eurasia Group questioned whether today’s global powers would respond as effectively as they did in 2008 or after the 9/11 terrorist attacks.
“There’s more than enough political stability in today’s world to handle the headlines of the day,” Bremmer said. “But as for the next crisis, I’d be less confident.”
Meanwhile, there have been stark recent warnings of another looming disaster.
The world is less well equipped to manage a major financial crisis today than it was a decade ago, according to Dominique Strauss-Kahn, a former chief of the International Monetary Fund (IMF).
In an interview with AFP, Strauss-Kahn — who ran the fund at the height of the 2008 financial meltdown — also said rising populism across the world is a direct result of the crisis.
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