Prop­erty prices a por­tent of GFC 2.0

Nelson Mail - - BUSINESS - ROB STOCK

Ann Pet­ti­for pre­dicted the global fi­nan­cial cri­sis, and now she’s warn­ing of another.

When Pet­ti­for, an ad­viser to Bri­tish Labour Party leader Jeremy Cor­byn, saw the global fi­nan­cial cri­sis (GFC) com­ing, she was ‘‘the lit­tle girl on the side say­ing the em­peror had no clothes’’ and ortho­dox econ­o­mists did not lis­ten.

But Pet­ti­for be­lieves all the signs are there that the cure for the GFC has set the world up for another.

‘‘I would say there is go­ing to be a cri­sis, and it’s look­ing quite a lot nearer than it has for some time,’’ said Pet­ti­for, who was in New Zealand to ad­dress the In­sti­tute of Di­rec­tors’ Lead­er­ship Con­fer­ence in Auck­land.

Af­ter the GFC, cen­tral banks in­jected some­where in the re­gion of US$11 tril­lion (NZ$15t) into the bank­ing sys­tem, she said.

Global debt lev­els spi­ralled from around 125 per cent of global GDP to more than 400 per cent.

All the cheap debt led to high as­set prices, but in­comes have been fall­ing.

‘‘There’s some­thing like US$293t of as­sets and li­a­bil­i­ties out there, and there’s US$76t of global in­come.

‘‘What econ­o­mists ar­gue is ‘don’t worry about the fact there’s not a lot of in­come, be­cause we have got all these valu­able as­sets, for ex­am­ple, Auck­land prop­erty prices’.’’

Pet­ti­for said all that was needed to cre­ate a new cri­sis was a loss of con­fi­dence in the value of the as­sets that all the debt was se­cured against.

Prop­erty prices had fallen in Lon­don, New York – and Auck­land.

How­ever, it wouldn’t be US mort­gages that trig­gered the next GFC.

‘‘I don’t think house­hold debt is the trig­ger of the next cri­sis. It’s cor­po­rate debt.’’

But people, and coun­tries, with high house­hold debt would be es­pe­cially vul- ner­a­ble in a cri­sis, es­pe­cially if they saw their in­comes de­cline.

Although reg­u­la­tors around the world knew a lot about reg­u­lated bank­ing, there was a gi­ant ‘‘shadow bank­ing’’ sys­tem of lend­ing between banks and other fi­nan­cial in­sti­tu­tions, and lit­tle was known in ag­gre­gate about it.

She has no ad­vice to give to Kiwi house­holds on how to pro­tect them­selves.

‘‘The only thing we can do, and this is my mis­sion, which is to spread knowl­edge of how the sys­tem works, and chal­lenge the or­tho­doxy.

"I don’t want us to be in the po­si­tion we were in 2009, where we were stand­ing there stunned.’’

Pet­ti­for be­lieves the world’s cen­tral bankers would not be able to re­peat the mea­sures they took af­ter 2009.

And yet, New Zealand may end up duck­ing a sec­ond GFC.

China may save New Zealand again, she said.

Ann Pet­ti­for

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