Bull markets are driven by the idea that a “new era of continued prosperity”, “exciting new technologies”, etc. is about to begin. Bear markets occur when this approach is proven wrong. The severity of the recession depends on how wrong the previous perception turns out to be, and in this particular case it is that interest rates will remain low indefinitely. This turned out to be a huge mistake. Let’s take a look at some of the big financial mistakes of the last 25 years. The Asian crisis erupted as soon as it became clear that the economies of Southeast Asia, the so-called “tigers”, were on a path of unsustainable growth. The collapse of the electronics companies showed that earlier forecasts of Internet traffic growth were overly optimistic. The global credit boom in the early years of this century was ultimately based on the widespread belief that home prices in the United States would never fall. The subsequent crash triggered the eurozone debt crisis, which exposed another misconception, namely that risk in eurozone member sovereign bonds was a thing of the past. These crises reveal a disturbing trend: each successive market crash tends to cause greater economic losses over a wider geographic range than previous ones.

Believing that interest rates will stay permanently low can be the most costly mistake. That’s because, as former Federal Reserve Chairman and Harvard economist Jeremy Stein observed a decade ago, “monetary policy is seeping through all the cracks.” Over the past decade, easy money conditions have reshaped the world’s financial markets and economies. Seth Clarkan, Boston-based hedge fund manager, wrote in early 2021: “The idea of ​​permanently low interest rates has permeated everywhere: investor thinking, market forecasts, inflation expectations, valuation model values, leverage ratios, debt ratings, prices on Housing and Corporate Behavior”. The great American economist Irving Fisher said that the interest rate is “everywhere.” Record low interest rates have created a bubble of everything. Now that interest rates are rising, everything is at stake. Since the beginning of this year, the world’s major bond and stock indices have fallen by more than 20%. There are tremors in regional real estate markets from Australia to China.

As the Federal Reserve tightens monetary policy to curb inflation, the dollar has risen sharply against other currencies. It turned the calculus of foreigners who borrowed trillions of dollars at low interest rates. High-yield bond spreads have widened, buybacks are floundering, and corporate mergers have stalled. For years, central bankers have argued that monetary policy should be separated from financial risk management. The problem is that, as Jeremy Stein found out, regulators have always lagged behind the securities yield curve as market participants desperately tried to shore up their profits.