Property prices a portent of GFC 2.0
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.