Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Another crisis one day cannot be ruled out

Posted by hkarner - 7. Mai 2017

Date: 04-05-2017
Source: The Economist

But recent changes have hade it less likely

IN 1992 SWEDEN nationalised (and subsequently merged) two banks: Gota Bank and Nordbanken, which was already mostly owned by the state. As in America 15 years later, property prices had first boomed and then plunged, bringing banks down with them. In 2001 Nordbanken was combined with Danish, Norwegian and Finnish lenders to create Nordea, the region’s biggest bank. It was not until September 2013 that the Swedish government sold its last shares in Nordea, finally drawing a line under a crisis by then 20 years in the past.

Banking crises leave deep and lasting scars on economies and societies. The one of 2007-08 was the biggest and worst since the 1930s, so the recovery was bound to take time. In a study published in 2014 of 100 financial crises going back to the 1890s, Carmen Reinhart and Kenneth Rogoff, two Harvard economists, found that real income per person took an average of eight years to return to pre-crisis levels. They identified 12 countries where systemic crises began in 2007-08, of which seven have so far clambered back at least to their starting-point.

Economic growth in America restarted in 2009 and has continued ever since, in one of the longest periods of expansion since the second world war. Unemployment has dropped to 4.7%. But growth has been unusually slow, averaging just 2.1% a year. The economy recovered its pre-crisis level of GDP per person only in 2013. Many Americans feel that prosperity is something that happens to other people—such as those who work on Wall Street.

Banking crises also have a habit of turning private debts into public ones: when banks are overwhelmed by foolish borrowing and lending, governments step in. America’s ratio of debt to GDP rose by about half between 2007 and 2011, though it has since steadied. Greece’s, Ireland’s and Spain’s went up even more. Although some have declined in the past couple of years, the countries’ ratios are still far above pre-crisis levels (see chart).

Central banks’ balance-sheets and interest rates also still bear the imprint of the crisis, not least because monetary rather than fiscal policy has been the principal, even sole, means of post-crisis macroeconomic support. Even if the Fed raises its main interest rate by another three-quarters of a percentage point this year, as most forecasters expect, that will still leave it lower than it was when Lehman collapsed. The European Central Bank, which cut its benchmark rate to zero just over a year ago, is still accumulating bonds, albeit more slowly.

The effects of the crisis are not just seen in the dry economic data; they are felt in the gut as well. Among the many and complex causes of the populism that carried Mr Trump to the White House and will take Britain out of the European Union is resentment of ill-defined “elites”: well-off, educated, at ease with globalisation and doing nicely from it, while ordinary folk struggle to make ends meet. Related to that is anger at the crisis, its consequences, the bail-outs of the banks—and the knowledge that bankers still earn bucketloads.

There is nothing new in that. Economic crises always have political consequences, which loop back into economic policy for decades to come. Germany’s twin fears of inflation and fiscal fecklessness, which arguably have held back recovery in the euro zone after the 2007-08 crisis, have roots in a series of 20th-century economic calamities, dating back to the hyperinflation of the 1920s. America’s Fed was founded in 1913 in response to a severe crisis in 1907; the country’s perennial arguments over the proper role of a central bank, and indeed the need for one at all, started when the First Bank of the United States was set up in 1791.

Crises often prompt an overhaul of regulations, in the hope of avoiding a repeat performance. Much of the complicated apparatus of American financial regulation today—the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, Fannie Mae—was erected after the catastrophic banking collapse of 1933. The Office of the Comptroller of the Currency was a product of the civil war. No one knows whether the Dodd-Frank act will survive Mr Trump’s promised assault or whether the latest version of the Basel capital-adequacy standards will be completed. But whatever the outcome, the arguments arising from the 2007-08 crisis are likely to carry on for years yet.

Wait for it
No one knows, either, when or where the next crisis will strike, but it seems certain that another one will come along some time, somewhere. In “This Time Is Different”, a book published in 2009, Ms Reinhart and Mr Rogoff wrote that banking crises are “an equal-opportunity menace”—as common, over the long sweep of history, in rich countries as in emerging markets. Giddy build-ups of debt are a warning sign. In the past couple of years, China, scene of another credit-fuelled property boom, has looked like the most vulnerable big economy.

Are the West’s banks safe for now? Bankers’ recent grumbles about capital requirements and the burden of supervision have caused some to worry that bad old habits may be returning. Those grumbles have different causes on either side of the Atlantic. America’s banks think they are strong enough to have their harnesses loosened, whereas some European ones moan that regulation is slowing down their recovery. But for both those groups the memory of ten years ago is still fresh enough to instil great caution.

Banks are never wholly safe, but they probably shouldn’t be. Capitalism, after all, thrives on risk. The best preparation for catastrophe is a thick equity cushion, and banks are certainly better upholstered than they were a decade ago. Still, with hindsight it is hard to imagine how they could have done much worse.

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