The next financial crisis will be worse than the 2008 crash. Here’s how the world can prepare for it
- Unilateralism, fragmented regulatory bodies, a depleted arsenal of tools at the disposal of central banks and increasingly complex financial markets will make it harder to deal with the next crisis
- A multilateral effort, both from governments and the private sector, is our best hope
Still psychologically scarred, few were keen last month to commemorate the 10th anniversary of the Dow’s rock bottom close in March 2009.
We can, however, dispense with platitudes about remembering the past or being doomed to repeat it. The fact is we aren’t set to relive a recession like that of 2008. The next great recession is likely to unfold in a manner fundamentally different from the last one.
Such novel institutions and instruments present features that are unfamiliar, and that require an evolving set of policy responses. This, in turn, necessitates integrated, cooperative regulatory bodies with streamlined information-sharing practices that allow regulators to stay abreast of developments.
Alas, global regulatory bodies remain far too fragmented. The US, for instance, has three federal bank regulators and two market regulators that often compete instead of cooperating. Meanwhile, the vice-chair of the supervisory board of the European Central Bank admitted last year that Europe’s regulators remain too fragmented to effectively supervise.
Moreover, post-2008 calls for central banks to play a more vigilant role have paradoxically led them to focus inward and neglect collaboration at the international level.
This lack of communication and collaborative action hinders regulators’ ability to police practices – and when the next crisis occurs, these disconnects will impede attempts to mitigate damage.
Such expansionary monetary policies are battle-proven and, in tandem with prudent fiscal policies, they enabled central banks to slowly restore the global economy to health. The hard truth, however, is that governments won’t have this weapon at their disposal this time around.
Fiscal stimulus could provide an effective alternative. But increased government spending faced stiff opposition during the last recession and is likely to confront more during the next. For advanced economies, the average government debt is now worth more than 100 per cent of gross domestic product, up 30 per cent since 2007.
If near-zero interest rates and a lack of information-sharing will impede and blind regulators, hopes of reversing a downturn will rest on a multilateral global response.
In 2009, collaboration helped avert disaster as Group of 20 nations pledged to borrow and spend what they could, and to abstain from new tariffs. But today’s political landscape is characterised by discord and economic nationalism – and joint action seems far less likely. Without communication and concerted action, the next crisis is likely to prove far more intractable.
Depoliticised private-sector global leadership forums, inviting people not just from business and politics, but from non-profits, religious communities and social ventures, may succeed in shaping solutions that forgo self-serving interests. Such forums, however, are at best symbolic as long as they do not hold themselves to the highest standards.
Dr Frank-Jürgen Richter is former Asia director at the World Economic Forum and founder and chairman of Horasis Global Meeting
