CNBC has a story about how credit crisis affect markets for decade : Credit Crisis Could Affect Markets for Decade
The credit crisis will affect financial markets for at least a decade and lead to greater regulatory powers for central banks, analysts at JP Morgan said.
“Market participants and regulators will focus intensely on controlling the risks that were at the core of the crisis,” analysts led by Jan Loeys and Margaret Cannella wrote in a note on Monday. These risks include lending standards in mortgages, leverage in the funding of securitized products, and the use of short-term financing for illiquid long-term assets outside of the regulated banking sector.
It looks like it takes a generation for the memory to fade and for the same mistakes to be made again. Global equity markets remained extremely cheap on all risk measures even five to six years after the end of the dotcom crash. As a result of these changes in behavior, banks will become bigger, safer and somewhat less profitable as they will retain more assets on balance sheet. Securitization will be reduced, and no longer rely on short-term funding structures that assumed liquidity as a given, although it will survive.
The biggest change as a result of the crisis will be in regulation, with the focus on the off-balance sheet structures that the financial world has created.
This was a run on the securitized world. The bank regulation and the structure of the supervisory system was created for a banking world of taking deposits and making loans. That world has moved towards capital markets, which were regulated from the point of view of consumer protection, but not from a systemic stability point of view. Banks did not have the tools to try to protect the capital market from its own excesses.
As a result, central banks will be forced to take on more power as they are the entities extending support to the markets, Loeys said.
With credit crisis looming upon the economy, the stock prices will be suppressed for years to come.