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Is a full-blown global banking meltdown in the offing?

March 25, 2023

Is a full-blown global banking meltdown in the offing?

If everything is fine, then why have US banks borrowed $153 billion at a punitive 4.75% against collateral at the discount window, a larger amount than in 2008/9?
A New Banking Crisis?

(Express Illustration)

Financial crashes like revolutions are impossible until they are inevitable. They typically proceed in stages. Since central banks began to increase interest rates in response to rising inflation, financial markets have been under pressure.

In 2022, there was the crypto meltdown (approximately $2 trillion of losses).

The S&P500 index fell about 20 percent. The largest US technology companies, which include Apple, Microsoft, Alphabet and Amazon, lost around $4.6 trillion in market value  The September 2022 UK gilt crisis may have cost $500 billion. 30 percent of emerging market countries and 60 percent of low-income nations face a debt crisis. The problems have now reached the financial system, with US, European and Japanese banks losing around $460 billion in market value in March 2023.

While it is too early to say whether a full-fledged financial crisis is imminent, the trajectory is unpromising.

***

The affected US regional banks had specific failings. The collapse of Silicon Valley Bank (“SVB”) highlighted the interest rate risk of financing holdings of long-term fixed-rate securities with short-term deposits. SVB and First Republic Bank (“FRB”) also illustrate the problem of the $250,000 limit on Federal Deposit Insurance Corporation (“FDIC”) coverage. Over 90 percent of failed SVB and Signature Bank as well as two-thirds of FRB deposits were uninsured, creating a predisposition to a liquidity run in periods of financial uncertainty.

The crisis is not exclusively American. Credit Suisse has been, to date, the highest-profile European institution affected. The venerable Swiss bank — which critics dubbed  ‘Debit Suisse’ — has a troubled history of banking dictators, money laundering, sanctions breaches, tax evasion and fraud, shredding documents sought by regulators and poor risk management evidenced most recently by high-profile losses associated with hedge fund Archegos and fintech firm Greensill.

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If Central Banks Are the Only Game in Town, We’ve Lost

March 4, 2019

If Central Banks Are the Only Game in Town, We’ve Lost

Relying on monetary policy to prop up asset prices and smooth out global volatility is a recipe for disaster.

Easy money has become a big problem. 
Easy money has become a big problem.  Photographer: Xaume Olleros/Bloomberg

Just since December 2018, central banks have collectively injected as much as $500 billion of liquidity to stabilize economic conditions. The U.S. Federal Reserve has put interest rate increases on hold and is contemplating a halt to its balance-sheet reduction plan. Other central banks have taken similar actions, fueling a new phase of the “everything bubble” as markets careen from December’s indiscriminate selling to January’s indiscriminate buying. 

The monetary onslaught appears a reaction to financial factors — falling equity markets, rising credit spreads, increased volatility — and a perceived weakening of economic activity, primarily in Europe and China. If they heeded Walter Bagehot’s oft-cited rule, central banks would act only as lenders of last resort in times of financial crisis, lending without limit to solvent firms against good collateral at high rates. Instead, they’ve become lenders of first resort, expected to step in at any sign of problems. U.S. central bankers are currently debating whether quantitative-easing programs should be used purely in emergency situations or more routinely.

Since 2008, the global economy has grown far too dependent on huge central bank balance sheets and accommodative monetary policy. The U.S. economic boom President Donald Trump loves to tout is largely fake, engineered by artificial policy settings. Such dependence is dangerous and, for various reasons, could well backfire.

For one thing, central banks are poor forecasters. GDP growth, inflation and labor markets may prove more resilient than feared, remaining at or above trend. Key risks, such as the trade dispute between the U.S. and China, may recede. Financial markets and asset prices have already recovered substantially.

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The Bubble’s Losing Air. Get Ready for a Crisis

December 16, 2018

The Bubble’s Losing Air. Get Ready for a Crisis

Investors need to focus on their response to financial stresses in an era in which policymakers will be constrained.

Not much to do once it pops.

Photographer: Spencer Platt/Getty Images

The “everything bubble” is deflating. The fact that it’s happening relatively slowly shouldn’t blind us to the real threat: The world is dangerously underestimating how hard it’ll be to deal with the fallout once it pops.

Frothy markets can’t disguise the warning signs. The shift to tighter monetary policies in the West is putting pressure on global equity and real-estate values. Even more critically, it’s weakening credit markets. Over-indebted emerging markets face headwinds from rising borrowing costs and dollar shortages.

At the same time, investors are underestimating how disruptive trade conflicts and sanctions could turn out to be. That’s not to mention rising non-financial risks — from the legal difficulties of the U.S. administration, to the U.K.’s Brexit debacle, to political instability in France, Germany, Italy and even Saudi Arabia. Uncertainty will impact the real economy, primarily through the wealth effect of declining asset values and a reduced supply of credit.

Investors need to start focusing on how best to respond to a new crisis. The choices are more limited than many realize. Historically, central banks have needed to slash official rates as much as 4-5 percent in order to offset the effects of a financial crisis or an economic slowdown. That’s why former U.S. Federal Reserve Chair Janet Yellen talked about the need to raise rates in good times — to provide room to cut when necessary.

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Deaf blind

September 12, 2017

DEAFBLIND

“Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem. ‘One of my favourite stories from that era is a lunch with you and our former colleague Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart ?” I responded something to the effect of, “Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century.”

To which you replied, “But is he smart like us ?””

Few things have the capacity to trigger an intense emotional response more effectively than this video of a 29-year-old deaf person hearing for the first time. For the able bodied, trying to imagine the life of someone missing one or more of the core senses feels pretty much impossible. In the UK, the Oily Cart theatre company specialise in providing entertainment for young people with profound disabilities. Their current show, an adaptation of Samuel Taylor Coleridge’s Kubla Khan, endeavours to create a theatrical spectacle for children who are both deaf and blind – which at first seems like an insurmountable challenge. But if you cannot engage with two senses, make the most of appeals to the rest. So for the participants in Kubla Khan, the seating revolves; the smell of incense wafts across the stage; the audience dip their hands into water, into which the stage crew blow bubbles through straws to conjure up a swirling River Alph. There are times when human ingenuity can be inspiring.

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Opinion: Inside the global elite’s bag of financial tricks

February 21, 2017

Easy money masks global economy’s precarious health

Shutterstock

Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.

Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital.

Major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.

Mergers and acquisitions as well as various types of corporate restructurings (such as spin-offs and carve-outs) have been used to create “value.” Given the indifferent results of many such transactions, the major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.Share buybacks and capital returns, sometimes funded by debt, have been used to support share prices. In January 2008, prior to the global financial crisis, U.S. companies were using almost 40% of their cashflow to repurchase their own shares. Ominously, that position is similar today.

Tax arbitrage, especially by international companies operating in multiple jurisdictions, has increased post tax earnings. The use by many companies of special vehicles in low tax jurisdictions, like Ireland, evidences this trend.

Some companies have used trading to increase earnings. Oil companies can make money from trading or speculating in oil, for example. Accordingly, they can make money irrespective of whether the oil business is good or bad or the price of crude is high or low, profiting from uncertainty and volatility. It is not even necessary to produce, refine, or consume oil to benefit from its price fluctuations.

…click on the above link to read the rest of the article…

 

Next Economy: The Coming ‘Age of Stagnation’

April 25, 2016

Next Economy: The Coming ‘Age of Stagnation’

Author Satyajit Das kicks off Tyee series on global capitalism’s crisis.

Satyajit-Das

Satyajit Das: Having worked in financial markets for three decades, Das sees a global economy ‘in peril.’

[Editor’s note: What kind of future will we inhabit? Many thinkers say we’re moving toward automated job scarcity, digital sharing gig economies, yawning wealth imbalances, post-carbon energy, explosive innovation, new values about consumption and contentment, capitalism 2.0… anything but business as usual. Over the next few months, this Tyee occasional series will talk to experts with differing visions of a transforming global economy.]

Satyajit Das believes the global go-go growth economy is quickly ending and a tough transition lies ahead. What to expect? The title of his new book succinctly predicts: The Age of Stagnation: Why Perpetual Growth is Unattainable and the Global Economy is in Peril.

An Australian born in Calcutta, Das draws on a range of experience — banker, corporate treasurer, industry consultant, academic, author — in making his prognostication. His views on what actually causes an economy to grow stand in contrast to how governments model and forecast economic trends.

Das argues factors that enabled decades of gradually increasing prosperity throughout the post-Second World War era will be overwhelmed by a range of financial, economic, demographic, resource, and environmental challenges in the next few decades.

The Tyee asked Das to break down those critical forces.

The Tyee: What is your future vision of the global economy over the next 20 years? What are the next few decades going to look like?

Satyajit Das: I think the last 50 to 60 years were quite odd in terms of the longer run economic history of the world. Now, we face a series of challenges. Some are financial and some are non-financial. But, they are all linked.

…click on the above link to read the rest of the article…

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