Economy

3 Reasons the Economy Is Facing a 2008-Style Recession

2008 financial crisis

As we march toward the end of the year, there are more and more mounting signs that recession is drawing closer. From plunging home sales to falling job openings to slower money supply growth, more and more indicators of recession are piling up.

Many people have already gotten nervous about what’s coming and have decided to start protecting their investments, with many deciding to start buying gold and silver to protect against asset loss during a recession. Others think the good times will continue rolling, and that as long as markets don’t crash there’s no reason to worry. And still others aren’t even paying attention to what’s going on in the economy, blissfully unaware of what’s happening around them.

But failing to pay attention to what’s happening could cost them dearly once recession occurs. And with the possibility that the next recession could be as bad as 2008 or even worse, failing to take action could end up having ramifications that last for years to come. Here are three reasons the economy could be facing a 2008-style recession.

1. A Fundamentally Fragile Banking System

We were told in late 2008 that the financial system was on the verge of collapse. Everyone was in a state of panic, and Congress rushed to pass a $700 billion bank bailout, a sum that at the time seemed astronomical.

In the aftermath of the crisis Congress passed the Dodd-Frank Act, something that was supposed to prevent the recurrence of another such crisis. Regulators enacted accompanying regulations, and we were repeatedly told by regulators through stress testing and regulatory oversight that the banking system was far stronger now than it was before.

But thanks to the work of analysts willing to look under the hood, we now know that the banking system may be more fragile than many people think. When push comes to shove, banks may not have the capital they need to survive through a major crisis, and they may already be functionally insolvent.

That’s obviously not good news for anyone, let alone bank customers. But it’s better to be aware of the potential dangers ahead of time. Going into a possible recession with a Pollyanna attitude that lightning can’t strike twice is a recipe for getting into trouble.

While we have to hope that regulators are aware of the dangers facing the banking system, we also have to remain cognizant of the fact that they weren’t aware of the dangers facing the banking system in 2008, and that they repeatedly tried to tell us in early 2008 that everything was going to be fine. With that kind of track record, it’s understandable that many people wouldn’t trust the Federal Reserve to engineer a safe landing.

2. Housing Market Weakness

For the past several months we’ve been seeing headlines touting the strength of the housing market. We’ve read that there won’t be another housing market collapse like in 2008 because mortgage underwriting standards have significantly improved since 2008. And we’ve read that tight housing supply will keep home prices elevated.

But the narrative has shifted recently, and now we’re starting to see more headlines acknowledging the reality that the housing market could be in for a rough time. Home sales are plunging and prices are starting to fall, as high mortgage rates are taking their toll. Home affordability has deteriorated, and it now can take close to $200,000 in annual salary to afford the average American home.

With the average American household income being under $90,000 a year, that’s obviously an unsustainable situation. Something has to give, the only question is what. Will housing prices fall? Will more single family homes be converted to rentals? Will prices fall back to pre-COVID levels, or even to post-2008 crisis levels?

No one knows exactly what’s going to happen, but to assume that things are going to remain just fine doesn’t exactly seem reasonable. We seem to be on the edge of a precipice that could rival 2008, if it doesn’t end up becoming worse.

3. Consumers Are Tapped Out

The US economy is driven by consumer spending, and when consumer spending falls, it’s either a sign that recession is imminent or a factor that helps contribute to a recession. And right now, US consumer behavior seems to be yet another indicator that recession is imminent.

Hardship withdrawals from 401(k) accounts have risen over the past 12 months, personal savings have plummeted over the past couple of years, and Americans seem to be more financially stressed than ever. Add high inflation, salaries that haven’t seemed to keep pace, and now a wave of layoffs that started in the tech sector and looks to move to other sectors and you have a recipe for severe economic and financial pain.

Businesses that were banking on consumer spending to keep them afloat are now facing rising inventory levels, along with inflation of their own. And with companies more indebted than ever, that could be a deadly combination.

Are You Prepared?

With these kinds of headwinds facing the economy, it’s more important than ever to be prepared for what’s coming. Millions of Americans were caught flat-footed when the 2008 crisis occurred, as markets crashed, taking years of accumulated investment gains with them.

This time it seems like we have more warning of what’s coming, and many people have already taken steps to protect themselves against the dangers of a coming recession. But many more people may be distracted, uninterested, and unwilling to take the steps necessary to ensure that they can make it through a recession with minimal loss.

Hopefully you’re not in that camp, but if you are, now is the time to start thinking about protecting your investments. With numerous ways to protect yourself against a recession, there’s no reason for you to remain at the mercy of markets that can plummet before you have time to react. Start looking to protect your savings today, so that you can save yourself the heartache and grief that will likely befall unprepared investors.

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