Seven years after the post-Lehman crisis, memories of the disaster are still fairly fresh. Whenever things get wobbly, many people in financial markets are still inclined to sell first and ask questions later.
We also saw this in the euro crisis hysteria of 2011-2012. In both cases, policy mistakes and the vulnerability of the financial sector allowed contagion to spread like wildfire, turning smallish incidents into big crises.
No surprise then that there are worries that the correction of the earlier borrowing binge in some emerging markets and the concerns about China could now cause a third wave of crisis comparable to those of 2008 and 2011.
I consider that risk as small, for three reasons:
1. Problem origin
In 2008 and 2011, the trouble was right at home (i.e., in the developed countries). In 2008, it originated in the big real estate markets of the U.S., UK and Spain.
In 2011, the world’s second-largest economy, the eurozone, descended into turmoil for a while as the ECB neglected to assume its role as lender of last resort. Today, the trouble is mostly in far-flung places.
2. Liquidity reserves
Households, companies and financial intermediaries have built up huge liquidity reserves after Lehman. On balance, they should be less vulnerable to shocks.
The suggestion that problems in the energy sector could bring down many other parts of U.S. industry looks unlikely.
3. Once bitten, twice shy
Policy makers remember the mistakes they made in 2008 and 2011. They will strive hard to not make them again and do their utmost to prevent any potential problem in parts of the financial industry from turning into a systemic issue.
That age-old insight holds for policy makers as well as investors. The result is a stark contrast.
While markets worry more than in the past that modest fundamental issues could spark a major crisis, the risk of that actually happening is probably much smaller than it was when households, companies and financial intermediaries had fewer reserves and when policy makers were less watchful.
That nevertheless leaves a further risk. Could a sustained sell-off in equity markets, overdone as it may be, by itself shatter business and consumer confidence so badly that the economy takes more than a temporary breather?
The risk looks all the more pertinent as we could observe an apparent asymmetry in recent years. Remembering the Lehman accident, households and companies do react to bad news.
Read more: A Third Wave of Financial Crisis? - The Globalist
We also saw this in the euro crisis hysteria of 2011-2012. In both cases, policy mistakes and the vulnerability of the financial sector allowed contagion to spread like wildfire, turning smallish incidents into big crises.
No surprise then that there are worries that the correction of the earlier borrowing binge in some emerging markets and the concerns about China could now cause a third wave of crisis comparable to those of 2008 and 2011.
I consider that risk as small, for three reasons:
1. Problem origin
In 2008 and 2011, the trouble was right at home (i.e., in the developed countries). In 2008, it originated in the big real estate markets of the U.S., UK and Spain.
In 2011, the world’s second-largest economy, the eurozone, descended into turmoil for a while as the ECB neglected to assume its role as lender of last resort. Today, the trouble is mostly in far-flung places.
2. Liquidity reserves
Households, companies and financial intermediaries have built up huge liquidity reserves after Lehman. On balance, they should be less vulnerable to shocks.
The suggestion that problems in the energy sector could bring down many other parts of U.S. industry looks unlikely.
3. Once bitten, twice shy
Policy makers remember the mistakes they made in 2008 and 2011. They will strive hard to not make them again and do their utmost to prevent any potential problem in parts of the financial industry from turning into a systemic issue.
That age-old insight holds for policy makers as well as investors. The result is a stark contrast.
While markets worry more than in the past that modest fundamental issues could spark a major crisis, the risk of that actually happening is probably much smaller than it was when households, companies and financial intermediaries had fewer reserves and when policy makers were less watchful.
That nevertheless leaves a further risk. Could a sustained sell-off in equity markets, overdone as it may be, by itself shatter business and consumer confidence so badly that the economy takes more than a temporary breather?
The risk looks all the more pertinent as we could observe an apparent asymmetry in recent years. Remembering the Lehman accident, households and companies do react to bad news.
Read more: A Third Wave of Financial Crisis? - The Globalist
