Lessons and consequences of the evolving 2007-? Credit Crunch

We are neither economists nor academic scholars; however we are students of the markets having experienced the credit crunch on the front lines as institutional investors from a country that is neither in Europe nor is the United States (i.e. Canada). The credit crunch and related “Great Recession” have instilled havoc on the global economy. The crisis has led to a large contraction of the real economy of approximately 1% of real GDP in 2009, which could have been considerably larger without massive government sponsored stimulus plans. In the aftermath of every crisis there are always lessons to be learned. The main takeaways from the most recent credit crunch centre on risk distortion, the flawed counterparty risk offset model, excessive leverage, inherent conflicts of interest and the legacy of creating “too big to fail” financial institutions. As financial markets appear to have stepped back from the brink of destruction, we believe that there are three major consequences that we are currently facing. First the global financial system will likely be irrevocably changed by new regulations. Second, on the economic front, we are facing a post-recession period of relatively low global growth. Third, developing countries’ governments are facing massive budget deficits and their debt/GDP levels are likely unsustainable and therefore requiring severe fiscal austerity programs.