Investors always like to look back at history when trying to figure out what is happening in the economy today. It is true that history can gives us great insights to the mechanics of what is happening in the economy, however, we cannot overestimate the power of this tool to understand the full picture of what is going on. Financial innovation always adds new complexities to the economy and creates new effects not seen before.
When analyzing the current crisis, we must first understand that this is the worst economic downturn since The Great Depression and that it has the potential of being much worse. If the Federal Reserve had not intervened in the markets, the U.S. economy (and the global economy) would probably be in a situation far worse than the Great Depression. as a result, statistics such as the one that “the average bear market lasts 18 months” are of very little these days.
As mentioned before, financial innovation changes the playing field. This is truly the first economic downturn where credit derivatives and many other complex financial securities are big players in the market. Therefore, the manner in which markets respond to the downturn may not be as predictable.
Lastly, the downward spiral has continued even though the government has bailed out many major companies and the Fed has injected trillions of dollars into the markets. The fact that this large scale liquidity infusion has failed to have any major effect means that the problems may be slightly different this time.
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