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Why the 2023 Recession is Not Like the 2008 Economic Crisis


The SVB Failure and Comparisons to 2008


In recent weeks, the financial world has been shaken by the failure of Silicon Valley Bank (SVB) and the uncertainty surrounding other financial institutions. As a result, some have begun drawing comparisons to the 2008 financial crisis. However, a closer analysis reveals that the 2023 recession is fundamentally different from the 2008 crisis.


Understanding the Distinction Between a Recession and a Crisis


First, it's crucial to understand the distinction between a recession and a crisis. A recession is a period of negative economic growth, typically characterized by high unemployment and reduced consumer spending. On the other hand, a crisis is a sudden and severe event, often involving a breakdown in financial markets or institutions, which can lead to a recession. The 2008 financial crisis was triggered by excessive risk-taking and leverage within the banking sector, which resulted in the collapse of major financial institutions and a subsequent recession. In contrast, the 2023 recession is primarily driven by rising interest rates, which has led to liquidity problems for some banks, including SVB but not all banks.


Bank Leverage: Then and Now


The 2008 crisis was marked by excessive bank leverage, with banks having $23 of deposit liabilities for every $1 of liquidity. This unsustainable level of leverage resulted from banks' reckless lending practices and a lack of investment in safe assets, such as US Treasuries. In contrast, today's banking sector boasts lower leverage ratios of 5x or 6x and a higher proportion of investments in cash and Treasuries, the safest assets in terms of credit risk.


The Federal Reserve's Role in Preventing a Systemic Crisis


The Federal Reserve has also played a significant role in ensuring that the current recession does not escalate into a systemic crisis. Timely interventions have provided liquidity support to the banking sector, preventing the collapse of a single bank from spreading to the broader financial system.


SVB's Unique Vulnerabilities


Despite the failure of SVB, it's important to recognize that the bank's unique focus on technology startups and venture capital-backed companies made it more vulnerable to the challenges posed by higher interest rates and reduced liquidity. Other banks are more diversified across industries, customer bases, and geographies, making them more resilient in the face of economic headwinds.


Stress Tests and Banking Resilience


Furthermore, the Fed's stress tests have demonstrated that major banks and financial institutions are well-equipped to weather a deep recession and significant rise in unemployment. This resilience is largely due to stricter banking regulations and higher-quality assets held by banks, which have been implemented in the aftermath of the 2008 crisis.


The Origins of the 2023 Recession


The 2023 recession is undoubtedly causing financial turmoil, but its origins lie in the rapid tightening of monetary policy by central banks in response to surging inflation, rather than a banking crisis. As central banks continue to hike interest rates, the trade-off between fighting inflation and protecting economic activity and financial stability becomes increasingly apparent.


The Broader Banking Sector's Strength


While the failure of SVB and the challenges faced by other banks have raised concerns, it is important to remember that the broader banking sector remains strong and well-capitalized. The recent market turbulence is not indicative of a repeat of the 2008 crisis but rather reflects the economic adjustments required in response to a rapidly changing interest rate environment.

A Nuanced Understanding of the 2023 Recession


In conclusion, the 2023 recession is fundamentally different from the 2008 financial crisis. While there are similarities in terms of market volatility and the failure of some financial institutions, the underlying causes and the overall health of the banking sector are quite different. As such, it is crucial for investors and policymakers to approach the current recession with a nuanced understanding of these differences and to focus on addressing the challenges posed by rising interest rates and inflation while opening our eyes to the opportunities this can also bring.


Remember, when some fall, others rise. And we are on the lookout for those rising opportunities.





If you got any questions on how this could affect your investments, you can reach our team at Lyon Bern.


LYON BERN

Wealth & Asset Management Experts headquartered in San Juan, Puerto Rico


Disclosure: Lyon Bern, LLC is a Registered Investment Adviser and is in the business of consulting and advising its clients in wealth and asset management. Each client's diversification between Lyon Bern's portfolios will be made individually and based on the client's Investment Policy Statement. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this document will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Lyon Bern, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional investment advisor. A copy of our current written investment advisory agreement discussing our advisory services and fees is available for review upon request.





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