Next financial crisis: Why it is looking like history may repeat itself
Sept. 15, 2018, will be the 10th anniversary of the collapse of Lehman Brothers, the fourth-largest investment bank in the United States. It was the definitive moment that pushed the US economy into the Great Recession and the worst economic crisis since the 1930s. It can happen again. In fact, the current direction in federal policy suggests it even may be likely.
On Sept. 29, 2010, the second anniversary of Lehman Brothers’ bankruptcy, the firm put their artwork up for auction at Christies. The auction comprised the artwork that hung on the walls of Lehman Brothers’ offices in Europe, CNBC wrote.
After unprecedented policies by the government to stabilize financial markets and reverse the economic carnage, the economic recovery is approaching its tenth year, but significant headwinds threaten to undo the progress made in the aftermath of the financial crisis. These concerns can be broken down into three key areas: Deregulation of the financial sector, uncertainty in the future Federal Reserve policy, and the increased speed of the revolving door between Wall Street and Washington, DC.
Too-big-to-fail banks even bigger now
At the top of this list is the continued prevalence of too-big-to-fail banks and the current deregulatory environment in Washington. Today only six banks manage half of the assets of the entire banking industry. Currently, 10 banks — including J.P. Morgan, Goldman Sachs and Citigroup — own more than 50 percent of the assets of the top 100 commercial banks.
Among them, J.P. Morgan has grown by 100 percent since before the financial crisis, and Bank of America’s assets have increased by more than 50 percent over the last 10 years.
Although the growth of these banks occurred in spite of the more stringent regulations enacted by both the Congress and Federal Reserve, they are healthier and more financially solvent because of them. The increased capital requirements have incentivized banks to raise more capital, and the institution of bank stress tests have allowed financial institutions to better monitor and manage their liquidity and exposure to risk.
But the bigger they are, the harder they’ll fall. Even though the post-crisis requirements, like increased capital and stress testing, have been good developments, that is set against the fact that the biggest banks are bigger today than they were 10 years ago. If deregulation leads to a worst-case scenario, they will fall even harder this time. It was precisely the pre-2008 deregulatory agenda, including the elimination of barriers between investment and commercial banking, that led to the development of complex financial instruments, such as credit default swaps and derivative markets. This encouraged excessive risk-taking by banks and mortgage lenders. By rolling back these regulations and dismantling portions of the Dodd-frank Act, the Trump administration is removing the safety net and creating a perfect storm that could lead to a crisis even worse than 2008.
Congress recently began repealing portions of the Dodd-frank Act of 2010, which was enacted to prevent another financial meltdown. Smaller and midsize banks would now be exempt from the more stringent oversight and stress tests designed to access the ability of these banks to withstand another crisis.
Trump attacks on Federal Reserve could bring back stagflation
The economic outlook also presents challenges to policymakers and, in particular, Federal Reserve Chairman Jerome Powell. country.
But ECB President Mario Draghi said the time was not ripe for such a change in the eurozone.
“The ECB and the Eurosystem currently have no plans to issue a central bank digital currency,” he said in a letter to a member of the European Parliament.
He added that technologies such as distributed ledgers ‘require substantial further development’ and that he saw no ‘concrete need’ to issue a digital euro.
Cash accounted for 79 percent of all payments at point of sale in the eurozone in 2016 and for 54 percent of the total value of those transactions, according to ECB research.
Separate ECB data published showed noncash payments were growing, however, with a 7.9 percent annual increase in 2017 led by cards.
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