Analysts Fear Next Financial Crisis Worse, Within Months

Massive money printing to restart the global economy after the financial crisis has blown an even bigger bubble. Ten years after the last financial crisis, is the world due another one and will it be worse?

Despite US Federal Reserve Chair Janet Yellen saying last month that another financial crisis on the scale of the crash that enveloped the world in 2007/8 was unlikely “in our lifetimes”, several respected stock market commentators believe a new disaster could happen within months rather than years, DW reported.

Jim Rogers, co-founder of the privately owned Quantum group of hedge funds, told the news website Business Insider in June that a stock market crash would happen “later this year or next”. In a separate interview with the business channel CNBC, longtime Swiss investor Marc Faber, who has been nicknamed Dr Doom, predicted some stockholders would “lose 50% of their assets” during what he described as an “avalanche” of selling.

Both investors have accused policymakers of kicking the can down the road by not addressing structural weaknesses in the global economy following the last financial crisis. The Great Recession, as it became known, was triggered by a fall in the US property market which led to mass defaults in the subprime mortgage market, which offered housing loans to high-risk consumers. It then developed into the worst international banking crisis since the Great Depression of the 1930s.

In an attempt to avoid a collapse of the financial system, the US central bank and others printed trillions of dollars by way of quantitative easing schemes, money which has been pouring into stock markets and other assets including property ever since. The Fed’s huge spending spree has led to record-high prices and complaints that the gains by most asset holders—in other words the richest 5%—haven’t filtered into the real economy.

 US Student Loans
Other analysts have pointed to other triggers for a possible new crash, including China’s heavily indebted economy, to which the rest of the world is increasingly interlinked, or a potential crisis caused by large-scale defaults on student loans in the US.

According to the Financial Times, the American student loans market is now bigger than spending on credit cards and car loans at $1.4 trillion, thanks to an increase in university admissions and tuition fees. The FT warned that eight million of the 44 million student loan recipients are currently in default, a problem that is likely to worsen amid a lackluster economic recovery.

Although other financial analysts aren’t so bearish about the immediate prospects for the global economy, they do agree that the current dependence on QE and ultra-low interest rates to keep economies growing is unsustainable.
“We’re reliant on high asset prices and continuing to inflate those asset prices, coupled with high levels of consumer borrowing, and that’s a bit of a toxic mix which leads to financial instability,” Fran Boait, executive director of the London-based campaign group Positive Money, told DW.

 Long Drawn Out Crisis
Boait argues that many countries have never really gotten out of the Great Recession; it’s just that policy makers don’t perceive what happened since as an ongoing crash. “It’s part of a long drawn-out crisis, where living standards are falling, real wages are falling and the majority of people’s lives are getting harder,” she said, adding that the public can clearly see the disconnect between their own lives and the financial and property markets being kept “pumped up” by QE.

Economist Iain Begg from the London School of Economics thinks a new financial crisis is unlikely for now, due to attempts by regulators to improve surveillance of the entire financial sector, rather than just individual institutions.

Rising interest rates are another risk that could precipitate an economic slowdown or even a property crash in several markets including the US, Germany, the UK and several Asian countries, as borrowers—who have become hooked on low rates—struggle to cope with the increased cost of living.

In another area of the economy, growing concerns about protectionism in light of US President Donald Trump’s pledge to bring back American jobs and other possible economic restraints—like Brexit—could knock business and consumer confidence, and become the trigger that brings about a new crash.

Financial Tribune
August 15, 2017