Is this 2008 all over again?

Karen Wallace: Hi, I'm Karen Wallace for Morningstar. Sharp losses and volatility in the bond market have a lot of investors wondering if we're living through 2008 all over again. I'm here with Eric Jacobson. He's a senior analyst covering fixed-income strategies on our manager research group with some thoughts on that. Eric, thanks for being here.

Eric Jacobson: Hi, Karen, good to be with you. Thanks for having me.

Wallace: Eric, with the exception of the long government category, most bond categories have fallen hard over the past few weeks. If this isn't 2008, what's different this time?

Jacobson: Well, Karen, there are a few things that are pretty different from 2008 in today's situation with the market. One of them is that there were a lot of funds going into 2008 that were taking on a lot more risks, and risks that today we would probably even consider kind of extreme. They had leverage, they were layering on credit derivatives, and so forth. Even though it wasn't a huge number of funds, it was a formula for disaster.

Another issue that we have, too, is that that crisis was not only a liquidity crisis but also a solvency crisis. There were a lot of things that funds held that were at risk of default, and some did default. There was a lot of damage done in the underlying markets.

This time around, so far, what we've been looking at is really just a liquidity risk, and it's the one that the Fed has stepped in and really managed pretty well by funneling money into the system. So, there's a really good chance that, when all is said and done, investors probably aren't going to suffer permanent losses as a result of defaults and so forth. But we've obviously had an ton of market volatility.

Wallace: Eric, would you say that a silver lining in this crisis is that the banking system is better?

Jacobson: I really do think so, that the banking system is better off than it had been. There are a lot of lessons that went unheeded after the financial crisis. But one of the most important that was addressed was that the banking regulators stepped in. They built up banking rules and what have you. And most of all, they encouraged and pushed banks to have much better capital cushions.

And as a result of that, today, the banking system is not at the centre of this crisis, and in fact, is well positioned to be a tool to help solve it. In fact, we've heard rumors that the Fed and regulators have tapped the banks on the shoulder and said, "Listen, your capital buffers are good, and we're not going to give you any trouble if you look to take on some more capital risks to help us keep the markets fluid and liquid."

And as a result of that, the banks didn't perform as well as they had in the years before the financial crisis, over, say, the last 10 because they were being more careful. But going forward, they're probably going to make a ton of money off of this, to be honest with you.

Wallace: Eric, thanks much for being here to help us make sense of this.

Jacobson: I'm glad to be with you, Karen. Thanks for having me.

Wallace: For Morningstar, I'm Karen Wallace. Thanks for watching.