The Ghost of the Past Financial Crisis Has Returned

Everyone who remembers the 2008 financial crisis remembers the role that collateralized debt obligations (CDOs) played in exacerbating the crisis. The way that financial companies packaged together billions of dollars of bad debt, diced and sliced them into securities that they then rated AAA, and sold them to unsuspecting investors seemed to be the epitome of the greed and shady dealing that characterized Wall Street at the time. But while the CDO market declined greatly in the aftermath of the financial crisis, it didn’t hit rock bottom until 2017, and now the CDO market is once again on the upswing.

One of the marks of a bubble economy is that investors and markets forget about the problems that the economy faced during the last recession. And every time someone points out that the same problems that caused or exacerbated the last crisis are returning, they’re met with the refrain, “This time is different.”

That’s exactly what people are saying about CDOs right now, that this time is different. Supposedly everyone has learned their lesson from the financial crisis and made sure that CDOs aren’t as risky as they used to be. For one thing, they’re claiming to tie CDOs to corporate bonds, which are supposed to be less risky. But corporate bonds today are riskier than ever, with the majority of corporate bonds now rated BBB, or one level above junk status. You can almost guarantee that once corporate bonds start to get downgraded that the CDO market will crumble just like it did during the last crisis.

The chorus of people claiming that this time is different should be an indicator to investors that we’re clearly at the height of the bubble and that the downswing will be here shortly. While the last bubble took over a year to move from its all-time high to its trough, this bubble seems to be taking even longer to burst than usual.

That offers investors the time and opportunity to diversify their holdings and hedge their portfolios with gold before the bottom drops out of markets. But time is of the essence, and investors who don’t heed the warnings and who fail to protect their investments will regret their inaction once the next crisis comes.