Stocks are plummeting. The economy is slowing. Politicians are scrambling to find solutions but are mired in disagreement. Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008.
The answer is a matter of fierce debate among economists and market experts. Many say the risks are lower today — at least in terms of an immediate crisis — because the financial system over all is healthier and there are fewer hidden problems. But the experts add that there are reasons to worry, and they do not rule out a quick downward spiral if politicians in the United States and in Europe cannot calm investors by addressing fundamental financial threats.
The core problem, as it was three years ago, is too much debt that borrowers are having a hard time repaying — but this time it is government debt rather than consumer debt.
“So far it’s not as bad as 2008, but it could get much worse because the sovereign debt concerns are much more global than the subprime mortgage risk of 2008,” said Darrell Duffie, a professor of finance at Stanford and an expert on the banking system.
A growing lack of confidence is perhaps the most troubling similarity to 2008 and the biggest worry. “There’s a level of fear out there that is a little similar,” said Michael Hanson, a senior economist with Bank of America Merrill Lynch. “It’s not just the fundamentals. It’s the fear of the unknown.” Unlike in 2008, when policy makers in the United States moved swiftly to bail out banks and provided guarantees to keep the financial system from seizing up, political divisions in Washington make bold action like another stimulus package much more difficult.
The Federal Reserve also has fewer tools to employ. It has already cut short-term interest rates to nearly zero, and two rounds of injections totaling more than $2 trillion to stimulate the economy have yet to fully restore growth.
“There’s only so much the Fed can do,” added Mr. Hanson, of Bank of America. “It’s a different kind of war now, but we’re out of conventional bullets.”
In Europe, where the current crisis originated, political leaders are at least as divided on a course of action as their counterparts in the United States, because different countries there are having a hard time reconciling their different interests.
“We haven’t seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible,” said Philip Finch, a global bank strategist for UBS. “We need confidence restored and there’s a lot of infighting.”