In a news article, CNBC’s Jim Cramer provides insights into how to differentiate between a decline in the market due to mechanical failures and a decline that indicates broader economic turmoil. Cramer specifically examines the 2007-2009 financial crisis, which was triggered by excessive mortgage lending to individuals who did not meet the usual qualifications for a mortgage. Consequently, millions of Americans defaulted on their loans, leading to a significant decline in the economy.
To determine whether a decline is systemic or a buying opportunity, Cramer suggests asking questions about the state of the economy. These questions include whether businesses are struggling, if there is a significant decline in employment, and the actions of the Federal Reserve in response to potential cracks in the system. If the decline is accompanied by runs on financial institutions and has the potential to collapse the entire country, then it can be considered a decline joined at the hip with the real economy, with true systemic risk.
While the 2007-2009 financial crisis was a once-in-a-lifetime bear market with true systemic risk, Cramer emphasizes that such declines are rare. However, before the crisis began, Cramer noted that there were warning signs of unsound practices in the mortgage market, indicating that something was seriously wrong. Overall, Cramer’s analysis provides insights into distinguishing between mechanical market failures and declines indicative of broader economic turmoil.