Have We Done Enough to Prevent Another Financial Crisis?

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By Brian Lucey, Professor in Finance (Business and Administrative Studies)

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Have we done enough to prevent another financial crisis? No. Have we done enough to delay one? Perhaps. Have we learned from the last one? Doubtful. Now you know why economics is known as the dismal science! Let me parse these ideas, and perhaps provoke some thoughts before the forum, where I will be joined by eminent thinkers on matters financial – Frances Coppola, Financial Writer and Commentator, Megan Greene, Managing Director at Manulife Asset Management, Alan Duffy, CEO HSBC Ireland, and Kyran McStay, Director and Founder of Key Capital.

We can no more prevent financial crises than we can stop the waves from washing on the shore. They are endemic, not just in capitalism but in human society.  The idea that we can stop the cyclical nature of crises took root post WW2, where in the developed world at least we saw very few between 1945 and the early 1970s. But 25y is barely a generation and making long-term inferences from one generational experience is a bad idea. There is a reason why the icy land north of Iceland is called Greenland, and it is not just marketing hype. An overlooked book from the 1840s (but one which I assign to students!) is Mackay’s “extraordinary popular delusions and the madness of crowds”. It’s a deep dive into the nature of crises. More recently the magisterial “this time is different” by Reinhart and Rogoff lays out in stark terms the extent of financial crises over the last millennium. So, no, we can’t prevent financial crises. It is known.

So have we done enough to delay one? Perhaps. We have poured a Golconda of tax payers’ money into the financial system in one way or another, through bailouts and quantitative easing.  For a given level of fixed it is fixed. We have beefed up regulations and the regulatory framework, we have had supranational and national inquires, we have even had economics as a discipline examining its soul (and finding it pure and unsullied…).  All parts of the financial system have become much more acutely aware of the degree of interlinkage. Chinese SME loans impact on Dutch mortgage holders; the actions of hedge funds shorting tech stocks impacts on the credit card debt of consumers and so on.

So what then have we learned? All too often I think we, like Jon Snow, ‘Know Nothing”. At least he came back after a near-life experience. By ‘we’ I mean, of course, the political classes who after all make the decisions. In general the solution to the debt precipitated crisis of 2007-8 has been… more debt.  The allopathic response has masked the problems but it depends on a benign constellation of low interest rates and renewed economic growth. The low interest rates can only be achieved by ever more QE, fuelling a bond bubble and driving a gadarene search for yield which has inflated bubbles all over the place. The unreformed nature of bank compensation and shareholder expectations, aligned to the above, has led to little productive lending.  There has been zero appetite for truly radical solutions – debt monetization or write-off, bank concentration limits, bank breakup and firewalling etc. So, we may wait, until the stars come right.  And then the next crisis will erupt.

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