Wednesday, April 20, 2016

Roots of the next financial crisis

Lawrence Hsieh just posted an article on the "Roots of the next financial crisis", where "the last one’s veterans give views".  The link to the complete article is here and the whole article is well worth reading!

One portion of the article quotes me (which I restate here).  Your thoughts?

"A financial crisis is never off the table: the question is, is it more likely now than at other times (except, perhaps, for 2007)? I think it is, for a variety of reasons. First, central banks world-wide now seem to be stuck at or near the zero lower bound, with little maneuvering room. The time-honored recipe of quickly cutting rates, when a recession looms, is off the table. Even more dangerously perhaps, the central banks may have lost control over inflation. Inflation is stable, good, but nobody quite knows why, and that is scary.

Second, Asia was the anchor during the 2008 crisis, now it may become the problem. We see it clearly in China now, with a variety of indicators. But more broadly, we have witnessed spectacular real estate booms in a number of Asian countries: partly for the sound reasons of their spectacular economic development, sure, but one cannot shake the feeling that there might be another real estate crash cum financial crash in the making. It should be a concern, if now parents in some of these Asian countries put their life-savings together, so that their offspring can afford the down-payment on condos that would be considered expensive even in large U.S. cities.

Third, the sovereign debt situation in Europe is far from resolved. Debt-to-GDP ratios are higher now than they were, when the European crisis started in 2010, yields on Greek debts have started to climb again. And, finally and with the low rates on sovereign debt, pension systems and financial investors are desperately searching for higher yields. What makes us so confident that the alchemists of financial engineering will not once again concoct another toxic brew, and sell it as snake oil? Vigilance is called for."

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