Financial crisis, the repeating cycles in capitalism.

Is capitalism falling?

(2)

“whatever created the 2007 crisis is not gone away and it will create another crisis soon. today’s leaderless world is sleep walking toward a huge economic depression”.  Gordon Brown. UK PM (2007-2010)

There have been an increasing number of economists, former FED chairs and authorities, experts and global financial institutions that are all warning of another huge financial crisis in the recent months. They believe that the state of the world economy is very fragile due to the rising presence of few well-known destructive facts and clues that caused the 2007 crisis such as deregulated financial market, inflated asset prices, high volume of low rate loans. Besides, the US protectionist policies and the emerging populist leaders in Europe who are promoting the nationalism have increased the uncertainties about the future of the global economy and order. Unfortunately, the global fragile economy and the protectionism movements together have a synergic power that potentially could cause a huge financial crisis and long-lasting global depression that ends the US capitalism leadership and devaluates the dollar as a world reserve currency. Who knows maybe the global economy will choose another leader when the world gains back its economic order.

Trade war & Protectionism

Gordon Brown, the Prime Minister of UK during the financial crisis (June 2007 to May 2010) presented a well analysis in September 2018 and declared strongly that “whatever created the 2007 crisis is not gone away and it will create another crisis soon”. He says, “today’s leaderless world is sleep walking toward a huge economic depression”. As the UK prime minister running the country during the crisis, he was well informed about the main roots to that crisis and today he is saying nothing has been done to address the problems that created the last crisis and we should expect for worst of all crisis.

He says if the global economy goes down, the world can not get together like 2007 due to the current protectionism movements in the world. One of the main causes that the great depression lasted very long was that the big economies were not working together. Prime minister Gordon Brown in his analytical presentation says that it is difficult to guess what would trigger the next crisis which is imminent. But the world economy is in the second part of economy cycle meaning the growth is going to decrease for sure.

Deregulated financial market

Since January 2017, the President Trump economists have been actively revoking many regulations. The Dodd Frank Act which was the key in keeping the financial institutions safe and sustainable is cut to many pieces and the Volker rule has been substantially changed and neutralized. Now the small banks can do both investment and commercial banking. The capital requirements, mandatory reporting, and pressure tests are all reduced to a point that are not able to do what they were designed for.

Many are concerned that once again the financial institutions have a chance to exploit and pollute the market in the absence of the monitoring and necessary regulation to keep the bankers honest. Nowadays, the US financial system is becoming less regulated, monitored, less transparent, and more speculative and risky market which is susceptible to any economy distress and political/social challenge. The Former Fed Chair, Dr. Janet Yellen said on Wednesday December 19, that she was worried about the next financial crisis. She said that the corporate debts had been growing and the financial safeguard’s such as Dodd Frank Act that were put in place after the 2007 crisis were being reversed which is worrisome.

the global debt, 1.6 times more than 2007

The International Monetary Fund (IMF) warned in October 2018 against another financial crisis that threatens the world economy. Christine Lagarde, the IMF’s head says the global debt, in both the public and private sectors, has increased by more than 60% in the last ten years. Currently the total amount of global debts is estimated to be between 182 to 220 Trillion dollars. 1.6 times more than the global debts in 2007.

The IMF annual report says that there is a list of concerns over the world economy that one might think it is going to be a dead end for the capitalism. While the global financial system needs restructuring more than ever, the US government is aggressively removing the rules that were made to keep the financial institutions honest and in control. It is said that the Dodd Frank Act has been cut to thousand pieces. 

Undetected Shadow banking

IMF says that the shadow banking operations have loaded the whole world with low interest rate loans by shadow bankers during the last ten years. Today many governments, corporations and consumers all around the world including Asian developing countries and China are in deep debts. These loans are mostly denominated in US dollars and any dollar strength or rate increase has a negative impact on the global markets and developing economies. The Shadow bankers have loaded the Chinese corporations and consumers with high volume unqualified debts, and china has failed to control these financial institutions.

Stock market is a leading indicator

The stock market is an important leading indicator that reflects the future trend of the economy. These markets have been losing the ground since September and all three major American indexes have lost around 20 percent of their value meaning the market is already in recession mode and all financial asset prices have lost their value and deflated which has a big negative impact on the GDP if continues.

The Goldman’s derivatives strategist John Marshall published an article in October and said that there have been increasing evidences that the market is going toward another crisis. professional investors reducing their positions and /or getting out of the market, the bond buyers have been increasing, the spreads are increasing, and the corporations are not borrowing any more.

So, the stock markets which are always the leading indicators of the future economy have been also signaling us about the coming economy slow down. Afterall the growing global debts have initiated a paradox with nationalism movements and have created a non-sustainable world economy in the less regulated market.

Conclusions.

The capitalism is trapped in a repeating periodical crisis cycle for the last one hundred years with similar causes or symptoms such as high debts, deregulations, speedy growth, high level of liquidity, Inflated assets, and low inflation. Unfortunately, these causes are all present today in the world economies and will make another financial crisis and long-lasting economic depression sooner rather later.

the amount of the global debts (Governments, corporations, consumers) is 1.6 times more than 2007. Undetected Shadow banking has been in place all around the world since the crisis 2007 and has loaded the whole world including China with the low rates loans. Today no developed country dare raises its rate much in fear of market crash. However how long could the countries keep their rates unchanged. If they don’t raise their rates, then the inflation starts getting out of control because of the tons of potential liquidity in the whole world market. So, in order to absorb these liquidities and control the inflation without raising the rates, they have been deregulating the financial markets to promote the investment (like 2004-2006) and again ignoring the human greed.

The financial hurricane is coming back for sure. but the timing depends on the monetary policies and decisions that will be made by the developed economies. If China and US stop the trade war and start negotiating, and/or if the US ,the European and developed Asian countries keep their rates unchanged, then the markets will perform better for a while , but the inflation will rise and ultimately the rates must be raised which in that case, the market falls and another financial crisis will be imposed on people.

In my opinion the interest rate is the starting key to this crisis. If it starts going up, the financial markets and the global economy will start going down. So, it should be handled very cautiously, otherwise they will have to reverse it down like 2006.

However, it is not all bad news. It is bad for those who are not aware of it. If we become aware of the coming market fall, we can take the best financial advantage out of it. there are very famous and successful investors in the history that have made millions in these kinds of situation. Some cash out and wait for the market to hit the bottoms and then buy very cheap as Warren Buffet did it in 1970s. Some hedge fund managers make millions of dollars by investing in alternative financial products.

You do not have to be super smart to take advantage of the coming crisis. Naturally the asset prices are going to deflate and decline very much and each of us could make some good investment in this process and divert threats to opportunities.

Thanks. Mahmoud Gonabadi

Speech Notes: Nov 22^nd. 2018. North Vancouver

Financial crisis, the repeating cycles in capitalism.

Is capitalism falling?

(1)

Studying the history of fiscal and monetary policies and the role of economists who created and enforced these policies since the first world war have been an interesting area of my studies during the last 12 years.

There have been numerous researches about the 2007 financial crisis among which many discuss about the similar state of the economy in the years prior to 1929 and 2007 crises. The speedy growth, excess liquidity, low inflation, high speculation, Lack of regulations, and less transparency were all visibly present in the years before these two huge crises.

Are we going to experience another financial crisis in near future? Are the financial crises the essential cycles for capitalism to Survive?

Nowadays, the state of the US economy and the monetary policies are again like the pre-crisis era of the yrs. 1929, and 2007. Besides, the danger of a global trade war, protectionism in Europe and slowing economy in China are also threatening the global economy and adding to the likelihood of another huge financial crisis in the early future.

Studying the history of these crisis and the role of the government policies, one could easily conclude that the root causes to these financial crises cycle have always been the government fiscal and monetary policies that drive the economy in the road of capitalism.

prior to any crisis there is a period when the market and economy go mad and behave recklessly with less transparency and supervision. In other words, long before a crisis happens, there are similar feeding factors that show up vividly and tell us that a new crisis is coming, but the human greed does not let us remember the past and we go through the same road again and again.

There has been a nonstop battle between the two different economy schools of thought in the western world since the great depression in 1929. One inflates the economy and repeal and decrease the rules and regulations, and the other deflates the economy with more regulations and supervisions.

The classic school or the free market economists generally believe that the market is smart and could regulate itself and decides when, how, what to produce. They believe that the markets do not need much of rules and regulations imposed by the governments. On the contrary, the other school or” Neo- Keynesians” believe the government mild intervention is necessary to protect the public, maintain the fairness, employment and prevent the market failure.

Mr. Greenspan as a Neo-classical capitalist served for 18.5 years (1987-2006). He and his colleagues such as Dr. Milton Friedman kept the interest rate low for 16 years and deregulated the financial and credit markets to be able to absorb all the liquidities flowing into US economy from wealthy oil countries and emerging Asian markets. They did not raise the wages and salaries due to existing excess labor coming from the eastern Europe.

In 2004, while supporting the President Bush tax cuts, Mr. Greenspan also started raising the interest rates slowly but continuously in every policy announcement from June 2004 to January 2006 meaning that the FED and monetarists economist were concerned and aware of excess liquidity and inflated credit markets. He raised the interest rate 14 times in his last 18 months of service from 1% to 4.5% until his term was finished in Jan 2006.

In February 2006 Dr. Bernanke became the US FED chair and continued the raising rate policy to cool down the housing market. But after three raise and when the interest rate stood at 5.25%, the market could not stand it anymore and the FED stopped raising the rate to avoid a total economy melt down. Too little too late. The new sophisticated financial products and services in a deregulated market had already spread out and polluted the Financial Industry during the last 19 years of free market economy.

Monetarists such as Dr. Greenspan kept the interest rate low, deregulated the financial market for 19 years and revoked many effective rules such as the Glass Steagall Act which was designed to prevent the bad banking practiced. Is the current state of economy like the years prior to 2007 crisis? Yes, precisely.

In February 2006, Ben Bernanke, a Neo- Keynesian economist became the new FED chair. His views were totally different from Dr. Greenspan. He Believed that the government must be supervising the economy and have an active role in guiding the economy toward a moderate growth, full employment and controlled inflation.

Dr. Bernanke had been studying and writing about all aspects of the 1929 depression for many years and was probably the best man to become the chair of FED and save the US and global financial systems skillfully. His findings about the great depression helped him to stop the crisis from spreading out to the whole economy.

He and his Keynesian colleagues such as Dr. Janet Yellen, Volker, Dodd Frank and other members of the FOMC committee proactively responded and reduced the market stress and did not let the crisis effect the other sectors of economy. Their transparent policies and plans worked well; they initiated a transparent interest rate policy announcement to avoid any market surprises and applied some Innovative rules and regulations while helping the financial institutions to survive and regain their power through initiatives such as the quantitative easing programs. They also introduced some new regulations such as Dodd Frank act and Volker rules to keep the financial institutions under systematic control in terms of their sustainability and compliance.

The neo Keynesians run the economy for twelve years and delivered it to the monetarist economists that are working for president trump at the present time. Although Dr. Yellen stayed until January February 2018, but the neo classics have been running the economy since 2017 with the same agenda to unleash the financial institutions to lend, borrow, and invest speculatively for themselves and others which reminds us of the same scenario that was played in the years prior to the 1929 and 2007 financial crisis. Isn’t it an avoidable repeating scenario? Maybe not. Is Capitalism dying? Maybe.

Speech. Feb. 2018 in North Vancouver.

To be continued.

Mahmoud Gonabadi

Dec 21, 2018