Next fi­nan­cial cri­sis: Why it is look­ing like his­tory may re­peat it­self

Iran Daily - - Tse & Global Economy -

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.

OLI SCARFF/GETTY IMAGES

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