In 2008, the extent of financial markets was spectacularly illustrated to the electorates of advanced Western nations as fears over a breakdown in liquidity in financial markets, or Credit Crisis, exploded into a financial crisis of global proportions. In response to the crisis, governments launched unprecedented schemes of financial assistance to bail-out private sector institutions in financial markets.
The United States government bailed out the mortgage lenders Fannie Mae and Freddie Mac; Britain nationalized Bradford & Bingley and injected £37 billion into the Royal Bank of Scotland and Lloyds TSB, in effect partly nationalizing them. According to the National Audit Office, at its peak, the UK taxpayers provided a bail-out to private-sector banking institutions of £1.162 trillion.
Furthermore, this insecurity, indeed volatility, in global financial markets, was transmitted into the real economies and helped plunge the global economy into turmoil. Almost every country in the United Nations was affected, resulting in most of Europe, Canada, and the United States all suffering from negative GDP growth in 2009 and slipping into recessions. This post will consider the reactions of policymakers to the global financial crisis, illustrating that the sources of insecurity in financial markets and domestic economies that precipitated the crisis are still evident in the global economy today. Another crisis could be just around the corner.
These sources of insecurities are none more evident than in continued trading in the very financial instruments that contributed to the original financial crisis. The notional amounts outstanding in over the counter derivatives trading stood in June 2013 at $693trillion. The global derivatives market in 2007 totaled $500 trillion. By 2014 this derivative market was worth $707 trillion. Further potential future volatility is also evident. In September 2012, trading in foreign exchange markets reached a record-breaking $5 trillion in just one day.
Meanwhile, financial institutions themselves, seem to have learned few lessons from the crisis. JP Morgan lost $2 billion in June 2012 in a “poorly executed hedge” on the part of an investment team which the senior management had failed to police and mal-practice continues to permeate throughout financial markets as evidenced by the LIBOR scandal. The City of London continues, meanwhile and despite the severity of the Crisis, as the global hub for financial markets.
George Osborne, Chancellor of the Exchequer, recently boasted that “London is home to 40% of the global foreign exchange business; 45% of the over-the-counter derivatives trading; and 70% of trading in international bonds. Mark Carney and I intend to keep it that way”. The Bank of England meanwhile, in its Q4 2013 Quarterly Bulletin, judged that the share of the City of London’s average daily turnover in foreign exchange had risen to US$2,725 billion in April 2013, a rise of 47% from April 2010, whilst over-the-counter-derivatives trading in the City now accounted for 49% of the global market.
Whilst Mr. Osborne continues the sycophantic relationship between UK Chancellors and the City of London, the Financial Policy Committee (FPC), the new regulator of UK financial markets within the Bank of England, has regularly warned over recent years that UK banks continue to be under-capitalized. Under the FPC’s worst-case scenario UK banks need to raise something in the order of £60 billion worth of capital to cushion themselves against further crises. To put this into context, this is three times the amount needed to bail-out Cyprus in 2012.
The insecurities of the financial market are not just a concern in the western world, however. China’s reliance on shadow banking is a worrying and potentially catastrophic example. Chinese shadow banking, which has been lending to Chinese business since 2009, now holds assets worth at least thirty trillion yuan ($4.9 trillion) equivalent to 50% of the entire Chinese GDP.
Already some products, emerging from the trust companies that form the core of the Chinese shadow banking system, have been defaulted upon and this year (2014) a further $400 billion worth of trust products have matured. Evidence suggests that the China Banking Regulatory Commission, which does monitor some trust products, is not regulating with sufficient authority to restrict risky lending.
Given the integration between the Chinese shadow banking system and Chinese business, a crisis in the Chinese shadow banking system would quickly transmit to the Chinese economy which in turn, because of the globalized economic world in which we inhabit would spread to the global economy. The UK economy, for example, is now inexorably linked to the fortunes of the Chinese shadow banking system via the City of London with George Osborne boasting in recent speeches that the City was home to 2/3rds of all Renminbi payments outside of China and Hong Kong.
The insecurity of financial markets is diametrically linked to other instances of insecurity within the global economy with some economists arguing that western economies are entering a period of secular stagnation. Here we would like to focus on personal or individual insecurity, linked to economic issues surrounding employment or income. More and more people are growing aware of the unequal financial distributions of modern economies as inequality becomes a major economic issue; increasingly states are adopting economic models that increase inequality whilst raising the wealth of the highest 1% resulting in low growth with low levels social mobility outcomes.
The United Kingdom is the perfect example of this model of economic development, nominal pay is increasing at only 0.6% per annum, well below the 4% pre-crisis average, and 80% of the highest paid jobs in the economy are taken by the 7% of individuals who went to fee-paying schools. Whilst the recent UK economic recovery seems to be reducing unemployment, the quality of these jobs, with much job creation being of the low-skilled, low-paid and part-time variety must be questioned.
However, increasing inequality and insecurity in the global economy does not necessarily translate into support for political movements, such as Occupy, campaigning for a new and more equitable political economy. The recent economic downturn has already seen the worrying re-emergence of fascist organizations, just as the Depression of the 1930s saw their emergence, throughout Europe such as Golden Dawn (Greece), Jobbik (Hungary), Danish People’s National Party (Denmark) and Front National (France).
Recent European elections have seen a worrying rise in votes for Far-Right political movements. If another financial crisis was to occur now the capabilities of states to counter-act that crisis must be sorely questioned. It is imperative that the relative economic roles of the market and the state are rebalanced and financial markets are once again made the servants of the real economy rather than their masters. If we do not undergo this task we could face not only the largest economic depression the global economy has ever witnessed but the breakdown of society and the return of fear.