When Crisis!

The Lehman Brothers’ bankruptcy “unleashed chaos”, but it also changed the financial system.

The questions now are — did it change it enough — and could it happen again?

Philip Aldrick in The Times:
• The short answer to this question is “No”.
• The one part of the system” that has been fixed is the liquidity regime.
• The bad news, though, is that many of the same pre-crisis dynamics are still with us.
• We have spent a decade fixing the system but evading the problem, which was always about cheap credit and too much debt.

Tommy Stubbington in The Sunday Times:
• A reckoning is coming
• The crisis unleashed an unprecedented response from central banks and policymakers, who slashed interest rates to near zero and pumped out trillions of dollars in quantitative easing to stave off meltdown
• Most experts agree these efforts were successful — in the short-term.
• But after ten years — with bucket-loads of cheap cash inflating asset prices and fuelling risky borrowing — there are worries that the response to the last crisis might trigger the next.
• Developing countries have gorged so freely on cheap credit that the Bank for International Settlements estimates that US dollar debt in emerging markets doubled to more than $ll trn in the decade to 2017
• Now central banks have reverted to shrinking their collective balance sheet
• It is no coincidence that emerging-markets currencies and bonds have gone into free fall

Will Hutton in The Observer:
• Even the limited reforms set in train since 2010 have not been fully implemented.
• Worse, the essential moral bargain remains in place.
• Finance can do more or less what it likes.
• We’re told that regulators are “more alert” and that banks are better cushioned by capital.
• Yet a cursory glance at markets shows how febrile they are – and how rich the pickings for those prepared to take risks.
• Note, too, the “shaky foundations” of the new wave of financial products, notably exchange-traded funds offering risk diversification
• All that is required is for, say, Turkey or Italy to default on their debts, an ETF to become distressed, or a sequence of Chinese banks to fail (all too imaginable).
• The impact would radiate across the network as it did in 2008.

Economist

Who was to blame?
• Primarily, the financiers
• Deregulation was also to blame.
• In 1999, the US Congress had demolished the barriers between investment and commercial banking, allowing high-risk investment with deposited money.
• Regulators also allowed banks to set aside too little capital to absorb losses.
• But the wider econo¬mic backdrop lulled nearly everyone into a false sense of security.
• The Great Moderation – the period of low inflation and stable growth that began in the 1980s – made the financial world seem less risky.
• The global savings glut — the surfeit of savings in, for instance, China and Germany – meant too much cash was chasing too few investment opportunities. All this encouraged risk-taking.Primarily, the financiers

What were the long-term effects of the financial crisis?:
• They were almost incalculable. Assets worth more than $2trn were written down as a result
• The value of growth lost was much greater

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