Market turmoil carries echoes of August 2007

[CHIMO]

There was a whiff of August 2007 in the air on Thursday as financial markets tumbled around the world. More than a whiff, in fact. The familiar stench of panic was back as shares fell heavily, bond yields in Spain and Italy rose and the search for a safe haven sent the price of gold to a new record level. Banks took an especially severe pummelling amid fears that they were exposed to the two big concerns of investors: a break-up in the eurozone and a double-dip recession in the global economy.

In a week of anniversaries, it was a day that conjured up all the wrong sort of memories. It was 97 years since Britain declared war on Germany, and the resulting financial turmoil meant the stock market, which had closed at the end of July did not re-open for business until early 1915. Yet even in the month or so after the assassination at Sarajevo, when the great powers gave up on diplomacy and prepared for conflict, the movements in financial markets were less violent than they were on Thursday.

More recently, it is almost four years since an announcement by the French bank BNP Paribas that it was temporarily suspending three hedge funds specialising in US sub-prime mortgage debt led to financial paralysis. Banks, it was discovered, had lent unwisely, were loaded up with toxic derivatives that were vulnerable to falling American house prices, and had far too little capital set aside for a rainy day. On 9 August 2007, the heavens opened.

On the face of it, the banks are in better shape than they were when Northern Rock became the first major UK high street lender to suffer a bank run since Overend & Gurney in the 1860s. They have been forced to build up capital reserves and to hold a higher proportion of their assets in liquid form – financial instruments such as government bonds that can be quickly turned into cash. Financial regulators have spent the past four years crawling all over the banks, making up for the not-so-benign neglect in the days leading up to the crisis, when supervision was far too lax. The UK's Financial Services Authority, the European Banking Authority, and America's Federal Reserve know where all the bodies are buried in their respective banks. In theory, at least. One of the parallels between August 2007 and August 2011 is the shiftiness of those running the show, a sense that they are not letting on all they know for fear of creating more panic.

http://www.guardian.co.uk/business/2011/aug/04/market-turmoil-august-2007