Nothing Has Been Fixed
As former British Prime Minister Gordon Brown notes in the New York Times:
The economist David Miles, who sits on the monetary policy committee of the Bank of England, may exaggerate when he forecasts financial crises every seven years, but most of the problems that caused the 2008 crisis — excessive borrowing, shadow banking and reckless lending — have not gone away [and speculation has shot through the roof]. Too-big-to-fail banks have not shrunk; they’ve grown bigger [background]. Huge bonuses that encourage reckless risk-taking by bankers remain the norm [indeed]. Meanwhile, shadow banking — investment and lending services by financial institutions that act like banks, but with less supervision — has expanded in value to $71 trillion, from $59 trillion in 2008 [he’s right].
Europe’s leaders aren’t the only ones with these blind spots. Emerging-market economies in Asia and Latin America have seen a 20 percent growth in their shadow-banking sectors. After 2009, Asian banks expanded their balance sheets three times faster than the largest global financial institutions, while adding only half as much capital.
In the patterns of borrowing today, we can already detect parallels with the pre-crisis credit boom. We’re seeing the same over-reliance on short-term capital markets that ultimately brought down Northern Rock, Iceland’s banks and Lehman Brothers.
While the internationalization of the renminbi is opening up new opportunities for global investment in China, it is also increasing the exposure of the global economy to any vulnerability in its banking sector. China’s total domestic credit has more than doubled to $23 trillion, from $9 trillion in 2008 — as big an increase as if it had added the entire United States commercial banking sector. Borrowing has risen as a share of China’s national income to more than 200 percent, from 135 percent in 2008. China’s growth of credit is now faster than Japan’s before 1990 and America’s before 2008, with half that growth in the shadow-banking sector. According to Morgan Stanley, corporate debt in China is now equal to the country’s annual income.
Although sizable foreign reserves make today’s Asia different from the Asia that experienced the 1997 crash in Indonesia, Thailand and South Korea, we are all implicated. If China’s economy were to slow, Asian countries would be doubly hit from the loss of exports and by higher prices. They would face downturns that would feel like depressions.
And China’s banking system may not be Asia’s most vulnerable. Thailand’s financial institutions, for example, appear overdependent on short-term foreign loans; and in India, where 10 percent of bank loans have gone bad or need restructuring, banks will need $19 billion in new capital by 2018.
International rules are needed for international banks. Without them, as the International Monetary Fund has warned, global banks will evade regulation “by moving operations, changing corporate structures, and redesigning products.”
Political expediency, a failure to think and act globally, and a lack of courage to take on vested interests are pushing us inexorably toward the next crash.
We will have another crash soon … because absolutely nothing has been fixed.
Indeed, things have only gotten worse since the last crash.