Macroscope | Why the next global financial crisis may dwarf the one in 2008
- Big risks today include the nonbank financial sector and high corporate debt. There are more ‘zombie companies’ now than at any time during the 2008 crisis, while huge dollar liabilities in banks outside the US and emerging market indebtedness add to the dangers
Recent turmoil in money markets that forced the US Federal Reserve to make huge injections of liquidity into the financial system was almost certainly a portent of more alarming things to come. And, while financial crises come and go with increasing frequency nowadays, the next one could prove to be the “mother” of them all.
The financial system has been strengthened by regulatory reforms since the 2008 global financial crisis but these reforms are unlikely to cope with the structural changes that have taken place since then. Money market upheavals this month reflect these unseen but very significant changes.
The danger of further squeezes in short-term markets that are vital to the functioning of the financial system is growing as so-called nonbank financial institutions rely increasingly on short-term markets to borrow against the security of corporate and government debt.
And this is but one symptom of a much wider malaise in the global financial system, according to research by Hung Tran, a former executive managing director at the Institute of International Finance. “It’s not easy to determine when a financial crisis is about to materialise and take action to forestall it,” says Tran, now a non-resident senior fellow at the Atlantic Council in Washington.
This is especially true if the next crisis comes in a new guise, as is likely to be the case.
Banks were at the centre of the 2008 crisis because of their excess liquidity and their consequent involvement with dicey debt obligations such as subprime mortgages and other collateralised debt obligations. They have since been brought under control but the big risks have migrated elsewhere in the system.
