Another financial crisis is coming, and thanks to Donald Trump we may not be able to solve it
David Brown says current conditions resemble those of 2007-08, but a wave of populist nationalism spearheaded by the US president is undermining global institutions that ended the Great Recession
My world fell apart during the 2008 financial crash when the bank I worked for bit the dust. My 30-year career in financial services went down the drain and hubris turned to humility. I was back on the street and looking for a new job. Some say I should have seen it coming. I did, but it made little difference.
A decade after Lehman Brothers’ collapse, could it happen again? Yes, it could and the world seems no better prepared. There is a storm coming and we are all standing in harm’s way. China will not be spared from another chaotic bloodbath in global capitalism.
Before the 2008 crash hit, I railed at clients, colleagues and management about the impending risks. The global financial system was a powder keg waiting to explode. The world was awash with debt, spreads and volatility were way too low and there was a disturbing mismatch between risk and return.
Risk-taking and leverage were off the scale and global regulators were asleep at the wheel. The United States ’ subprime mortgage crisis might have lit the fuse but it was more deep-rooted disorder in the global financial system which fuelled the subsequent inferno.
If the world needed proof that greed was indeed bad and excessive exuberance was the greatest threat to global stability, then we should have learned our lessons the hard way after 2008.
Sure, global regulators have papered over some of the cracks in the banking system, forcing banks to bolster capital reserve ratios and toughen rules and regulations on risk-taking. But it seems more akin to re-arranging deckchairs on a sinking ship. The underlying dangers have not been tackled and, if anything, the risks have proliferated.
Right now, the world is probably less well equipped to tackle a new market pandemic. In 2008, global interest rates were much higher, quantitative easing and mass monetisation were merely textbook theories, while fiscal pump-priming was anathema to most budget-conscious governments.
What made the difference was that there were enough multilateral-thinking policymakers willing to turn the tide. Preserving international order was the prime directive over national self-interest at the time. They could afford to turn on the super-stimulus and they did so in a very determined way.
A decade on and the world seems to be running out of options. Global interest rates are close to rock bottom, quantitative easing has run out of steam and government priorities have returned to budget-cutting and austerity.
The good news is that global liquidity has been given a mighty push in the past 10 years, providing a decent impetus to global growth, but the big question is how long it will last.
The risks to world recovery are legion, but if there is one glaring danger that stands out from the crowd, it is the capricious leadership of US President Donald Trump.
On the one hand, he might have delivered a big boost to US growth prospects with tax cuts but, on the other, Trump has set America on a very dangerous collision course with China, Europe and many others over trade. The trade war is the greatest single threat to global peace, stability and prosperity at the present time.
The trouble is that there is very little we can do about it. The rise of political populism and the switch away from benevolent internationalism to narrow, national self-interest is growing by the day.
The influence of multinational organisations like the International Monetary Fund, the World Bank, the OECD, Nato and the United Nations are on the wane, thanks to the steady withdrawal of political support from America.
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The next time the crisis hits, the supranational agencies will lack the punch to make a difference. And whether it is a trade war, debt crisis, global recession or financial market meltdown, the former stalwarts of concerted multilateral intervention are no longer on the scene.
The architects of the 2008 bailout are long gone. The worry is the new generation of global policymakers lack the wherewithal, remedies and the conviction next time around.
In 2008, the impact of countries working together was greater than the sum of the parts. Only full-scale, concerted global intervention can deal with the next crisis. I doubt whether it can be salvaged.
David Brown is chief executive of New View Economics