Bubbles pose meltdown risk
SOME five years after the Great Panic, the International Monetary Fund has declared the financial crisis over, or at least sort of over. Ending the age of instability, through a long period of record low interest rates and the printing of money, has brought a new set of problems in the shape of bubbles.
These are springing up all over the place. The most obvious example in Britain is in the housing market with the latest Royal Institution of Chartered Surveyors report showing sales levels reaching a six-year high in the first quarter of 2014. This is not the only worrying aspect of the post crisis era.
A chart in the IMF’s global financial stability report shows gross household debt to be the highest among the advanced nations at 95 per cent of gross domestic product, against 81 per cent in the credit-hungry United States. Only Ireland is ahead of Britain.
The same chart shows that even though the UK banking sector has been shrinking assets to meet new regulatory requirements and to make itself safer, the gross debt represents 242 per cent of GDP and is only outpaced by Ireland at an astonishing 699 per cent, or seven times GDP.
How much of that relates to the Irish offshoots of British banks – such as troubled Ulster Bank, part of RBS – is not made clear.
Other bubbles identified in the global stability report are the rise of the shadow banking sector in China, the huge rise in junk bond status corporate debt in the United States and the surge of investment by ordinary punters in Exchange Traded Funds.
Many of these are thought to hold potentially dodgy and little-understood credit instruments.
The Fund’s hope is that all these ‘hot spots’ do not explode at the same moment causing a ‘systemic liquidity imbalance’ – a polite term for a meltdown.
Could the world cope so soon after the traumatic events of 2007/09? The IMF seems to think so and believes banks are now better capitalised and the regulators more alert to dangers.
Maybe. But there was a lot of confidence that risk had dissipated before the last crisis.
Dark pools
THERE are few financial writers better able to capture the zeitgeist than Michael Lewis.
His latest book Flash Boys, which investigates the fast money being made from high-frequency trading that lives off the millisecond advantages speedier technology can provide, looks to have had more success in closing down the loophole than all the regulators in the world can muster. The Wall Street Journal reports Goldman Sachs has decided that high-frequency, secret trading is a little too edgy for an investment bank doing God’s work and is moving to shut its dark pool trading operation, known as Sigma X.
This is no small deal in that overall stock trading mustered $7.7billion of income for Goldman in the last financial year.
Goldman, apparently, has become concerned about the bank’s dark pool operations because of system glitches and growing criticism of the way this f orm of trading operates.
Aside from the speed of operations dark pools also offer traders a greater degree of anonymity than in the public markets.
In January 2014, the last month f or which there i s data, it is estimated that 14 per cent of trades went through these high-frequency systems.
If Goldman decides to pull out, rather than take the opprobrium, this will raise difficult questions for the group’s main competitors in the dark pool space, including UBS, Morgan Stanley and, from a British point of view, Barclays.
Antony Jenkins, the chief execu- tive of Barclays, is committed to creating a more ethical bank.
He is also in the middle of a strategic review that is looking at whether the universal banking mode makes much sense in the post financial crisis world, where a ring fence is being placed around investment banking activities.
It is not yet clear which way Jenkins intends to jump, but he might conclude that the risks of high-frequency and dark pool trading are too heady a cocktail for a cleaner bank.
Cuban adventures
AFICIONADOS of the John F Kennedy era will remember the efforts of the CIA to bring down the Castro regime with Ian Fleming-style devices such as exploding Havana cigars.
In the age of social media we now learn the Americans still haven’t given up on unsettling their Communist neighbour.
The brilliant idea this time was a failed Twitter-like platform called ZunZuneo, developed by Creative Associates i n Washington and Mobile Accord i n Denver and funded by the US Agency for International Development. Good try.