Three ways the coronavirus could trigger a global financial crisis – and why central bankers are to blame

Heavily leveraged tourism-related companies such as airlines, the commercial real estate sector and the residential property market are all vulnerable pressure points

Cutting interest rates will not help these sectors, but it will boost speculation

Reading Time:4 minutes

A trader reacts at the New York Stock Exchange on March 9. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index all notched up their worst daily declines in years over concerns of a possible oil price war and economic slowdown resulting from the coronavirus. Photo: Xinhua

Published: 1:00am, 12 Mar 2020Updated: 7:10am, 12 Mar 2020

The US Federal Reserve has just cut interest rates by half a percentage point and the Reserve Bank of Australia by a quarter of a percentage point, while some expect the European Central Bank, with interest rates already at zero, to directly fund small and medium-sized enterprises.

These central banks are acting like they can save the world, but markets are unconvinced. It seems that the central banks, after playing markets like maestros with quantitative easing and extremely low interest rates, have finally met their match in Covid-19.

Central bank moves are sustaining the largest financial bubble in human history. After 2008, these banks helped the global economy recover by jacking up asset prices through quantitative easing. The high asset prices encouraged investment fuelled by cheap funding and boosted consumption through the wealth effect.

This Ponzi scheme keeps going as long as inflation doesn’t rise and speculators remain enthusiastic. The coronavirus is sending shivers down the spines of speculators, with good reason. Central banks just don’t have the power to drive these fears away.

The coronavirus is a shock for both supply and demand. Some areas are more affected than others. Monetary policy is not effective at addressing such a complicated blow to the system.

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