Going bankrupt is usually a gradual process. Likewise, the problems that Capitalism faced in 2008 did not arise overnight. Did George Soros 2008 prediction provide a map of three dangers, which could cause Capitalism to collapse?
“First Shoe to Drop: Housing”
George Soros discussed the timeline for the 2008 Sub-Prime Crisis in his book – The New Paradigm for Financial Markets: “[t]he outbreak of the current financial crisis can be officially fixed as August 2007. That was when the central banks had to intervene to provide liquidity to the banking system.” “On August 6 , American Home Mortgage, one of the largest U.S. independent home loan providers filed for bankruptcy ….” The first two problems for Capitalism are 1. Housing and 2. Banking.
Sub-prime homeowners could not repay their debt. But why should housing endanger the solvency of the Capitalistic banking system?
“Second Shoe to Drop: Banking”
Lehman Brothers and Bear Stearns would repackage the housing loans from Countrywide into mortgage-backed securities (MBS). These two financial juggernauts went bankrupt because their MBS assets were not valuable enough to balance their liabilities. Their balance sheet was full of “hot air.”
In 2008, the entire banking system held these same non-performing MBS on their balance sheets. This lead to small mortgage banks failing. Larger banks might have credit default swaps (CDS), which were also worthless in the new environment. In a sort of “margin call,” the banking system was concerned that it did not have enough cash on hand to handle the everyday requirements for capital. Credit markets froze up.
The United States government via the Federal Reserve and Treasury saved the credit markets by guaranteeing the non-performing loans. Quantitative Easing programs would purchase bad debt. The capital started flowing again.
“Final Shoe to Drop: Petrodollar”
In his aforementioned book, George Soros discussed the third leg that could destroy Capitalism: “the willingness of the rest of the world to hold dollars is impaired.” By guaranteeing bad loans, the United States weakened a third asset: 3. the Petrodollar. If investors believed the US was close to default, they would abandon the petrodollar as a reserve currency.
During a Sri Lanka economic forum, George Soros suggested that global markets in 2016 resembled global markets in 2008. To make matters worse, oil prices in 2016 were falling rapidly according to the New York Times – “[t]he oil industry, with its history of booms and busts, is in its deepest downturn since the 1990s, if not earlier.”
George Soros 2008 prediction suggested that a “New Paradigm for Financial Markets” was needed. As he warned in 2008, weaknesses in the housing, banking and petrodollar could have serious repercussions for Capitalism going forward.