A New Stage of the Financial Crisis

When the Cyprus banking system went down in flames last month, something amazing happened: Global markets barely noticed.

Panic didn't spread. The Dow Jones (DJINDICES: ^DJI  ) didn't crash. Gold didn't spike. Investors around the world took the news with an impressive amount of calm.

Compare this to how markets reacted to Greece's near-implosions from 2010 to 2012. As I wrote a month ago:

We are entering a new phase in the global financial crisis. We've calmed down and are taking more deep breaths. Dire headlines are now treated with more equanimity as investors sort through news and take a long-term view of the consequences, rather than the sell-now-think-later approach that prevailed for most of the last five years.

That's the theory, anyway. Last week I asked Liz Ann Sonders, chief investment strategist of Charles Schwab, what she made of the market's shoulder-shrug response. Here's what she had to say (transcript follows):

Sonders: I think some of it is sort of crisis and panic fatigue. Some of it is that, to some degree, the expectations bar has gotten so low in terms of what's going on in Europe, but frankly to some degree also what's going on in the U.S., at least as it relates to sort of policy and leadership -- that once you get an expectations bar set low enough, it just becomes a lot easier to hurdle it. Then you of course have the Draghi pledge to do whatever it takes, so there's some view that the ECB will step in if there's any kind of crisis, but then it's also looking at what actually happened as the news was coming out from Cyprus.

At least on the surface, we did not see problems in the Cyprus banking system turn into bank runs in Spain and Italy, although the ... bond auctions were relatively weak, they were not anything that would signal sort of crisis mode. We didn't have a sense that we're starting the beginning of a run. Spreads didn't widen out like crazy. A lot of the things that would have -- did happen, and we would expect to have happened a year or two ago, so I think some of it is just we're far enough along in this.

We've gotten through some of these big speed bumps without the eurozone falling apart or without a single country leaving, and that we've got the pledge from Draghi to do whatever it takes. You've got global central banks all around the world now easing policy, so the Fed is not alone anymore. There's a tremendous amount of liquidity being thrown into the financial system across the globe, and I think that's helped to temper some of these concerns as well.

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