Gary Stevenson

Nobody could get a loan.

Governments had to like go in and bail them out.

There's a massive collapse in the economy, in living standards, a massive spike in unemployment.

It's generally accepted that this was bad for the economy.

After that, three years later, we had the 2011 sovereign debt crisis, which was a crisis where basically primarily European governments found that traders and economists thought that they couldn't pay their debts back.

And governments in many cases were forced to do austerity.

The UK was already doing austerity, but most obviously Greece was forced to do enormous public spending cuts.

This was also bad for the economy.

So it was generally accepted

that these crises were bad for the economy.

But a narrative started to form about why they pushed asset prices up, which was quite simple, which was that these crises caused interest rates to be pushed down.

So some context on interest rates.

Interest rates, which is the amount that you pay to borrow money, the amount you get for lending money.

Before 2008, before the Lehman crisis, they were at levels generally in the West, which are similar to where they are now, sort of 4%, 5%, maybe a little bit higher than they are now.

And when 2008 happened, the main sort of systemic response, the main response by governments and central banks, the institutions who are supposed to manage your economy, was to aggressively slash interest rates to effectively zero.

This happened in 2008.

It also happened during COVID.

So you see this massive reduction in interest rates to zero and this was generally came to be accepted that the reason that asset prices did well in the long run after the 2008 Lehman crisis despite the economy being weak was that interest rates were massively massively reduced.

Now, in economic theory, there's supposed to be quite a tight relationship between interest rates and asset prices.

And I'll explain why.