GOLDMAN: Here's The Simple Reason We're Probably Not About To Have Another Huge Crash

The financial crisis was so traumatizing, people haven’t been able to stop worrying that it could happen again very soon.

Questions like “when’s the next crash?” or “when will be the next bailouts?” have been talked about basically non-stop since 2009.

According to Goldman, another real bust (by which they mean a big stock market drop, a housing market drop, and a recession) is pretty unlikely.

Historical analysis of past big busts done by top economist Jan Hatzius and Sven Jari Stehn shows that while there is growing risk of a stock market drop (because of the big rally) we’re missing one of the key preconditions needed for a true bust: high credit growth.

They write:

[C]redit growth is the most important predictor of house price busts, especially when we focus on busts that involve a recession. House price busts have also tended to follow periods of high inflation, high equity volatility and large current account deficits, although all of these effects become less pronounced when we focus on recessionary busts. .

[T]he current picture looks reasonably reassuring from a macroeconomic perspective. The runup in equity prices since 2009 has modestly raised the estimated risk of an equity bust from low to near-average levels. However, the risk of a recessionary equity bust or any kind of housing bust remains low. The key reason is the weakness of credit growth in recent years.

To have a real painful crackup you need to have a major credit buildup. There have been some signs of credit accelerating lately, but overall we’ve barely gotten anywhere.

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