Wednesday, September 26, 2018

Vox: How Close Are We to Another Financial Crisis? 8 Experts Offer Their Thoughts

A big thank you to a blog reader who pointed me to this article appearing in Vox that was recently featured in this weekly newsletter from the Cato Institute. Below are a couple of excerpts from the Vox article.

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"It’s been 10 years since Lehman Brothers collapsed, setting off a global financial meltdown that would take years to correct. A decade later, there are some guardrails in place to prevent a Great Recession 2.0 — but another crisis at some point is essentially inevitable.

. . . .

A decade later, there’s been a lot of reflection on what happened in the financial crisis — and whether a repeat could be on the horizon. I reached out to eight experts to ask how far we’ve come, specifically in terms of government policy, in guarding against another financial and economic calamity. Simply put, are the guardrails in place to prevent another financial crisis like what happened in 2008?"


Here are some of the comments of one of the eight experts interviewed as an example of the type of input they offer:

Bill Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis:


"The guardrails are not in place to prevent another crisis like 2008. However, I don’t think another crisis like that is likely anytime soon. The underlying conditions in the economy and financial markets are very different today, in large part because the crisis occurred and left lots of damage in its wake. . . . . "

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Added note: Claudio Borio offers these comments in the most recent quarterly update from the BIS (Bank for International Settlements):


"If we take a further step back, the bout of volatility engulfing EMEs should not come as a surprise. As noted in the BIS Annual Economic Report, these developments are symptoms of a broader malaise. The highly unbalanced post-GFC recovery has overburdened central banks. The powerful medicine of unusually and persistently low interest rates has served to boost economic activity, but some side effects were inevitable. The financial vulnerabilities that we now see are, to some extent, one such example. The market ructions are akin to a patient's withdrawal symptoms.

What happens next is, as always, hard to tell. Will the patient continue to mend, as looked likely until the first quarter of this year, or will there be a relapse? What one can say is that the patient's full recovery will not be smooth. On the financial side, things look rather fragile. Markets in advanced economies are still overstretched and financial conditions still too easy. Above all, there is too much debt around: in relation to GDP, globally, overall (private and public) debt is now considerably higher than pre-crisis. Ironically, too much debt was at the heart of the crisis, and now we have more of it - although, fortunately, banks have reduced their leverage thanks to financial reform. With interest rates still unusually low and central banks' balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse. Moreover, the political and social backlash against globalisation and multilateralism adds to the fever.
Policymakers and market participants should brace themselves for a lengthy and eventful convalescence."
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My added comments: The comments in this Vox article are pretty much in line with what I have heard from other experts. The thinking seems to be that the potential for another major crisis does exist, but most do not see any signs that one is on the near term horizon. The most frequently mentioned potential triggers for another crisis I see mentioned are:
- trade wars & currency wars leading to actual wars
- shadow banking where regulators are not able to assess systemic risks very easily
- derivatives within a highly interconnected banking and financial system
- emerging market problems with a rising US dollar
- consumer debt and student loan related debt (too high a default rate)

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