Category Archives: Financial Crisis

End QE now or risk a new financial crisis, warn Germany’s ‘Wise Men” – Telegraph

The European Central Bank must end its unprecedented stimulus measures in order to prevent a new financial crisis from erupting in the eurozone, Germany’s top economic advisers have warned.

The Council’s annual report delivered a scathing verdict on the ECB’s recent measures, warning of the perils of record low interest rates.

“Monetary policy is leading to a build-up of risks to financial stability which could pave the way for a new financial crisis,” they said.

“Persistently low interest rates erode the earnings of banks and life insurance companies, and raise the appetite for taking risks. It is important to avoid delaying an exit from the low interest rate environment for too long.”

End QE now or risk a new financial crisis, warn Germany’s ‘Wise Men” – Telegraph

Insurance companies have a minimum guaranteed rate of interest on their investment products like annuities. But what happens when actual interest rates drop below that guaranteed minimum rate? They have to create new products (for new policyholders) with a lower guaranteed minimum rate. And they are stuck with reinvesting at very low rates for existing policyholders. If rates stay too low for too long then there is going to be pain.

Actuaries can figure out how long to invest assets for each product. So maybe a lot of assets are invested for 5 or 6 years. But eventually these assets will mature and some will need to be reinvested – at a very low rate. Also, policyholders aren’t stupid. They don’t lapse their products nearly as much in a low interest rate environment. That means the insurance companies are stuck with even more assets to reinvest at very low interest rates. This just adds to the pain.

Emerging markets slowdown is third and last wave of crisis –

Arguably we are nearing an important inflection point, or crossroads, for economies and financial markets alike. Down one road lies the path to “secular stagnation”, made more plausible by the weakness in EM economies and the fear that the policy tools within developed markets to offset deflationary forces are becoming increasingly blunt.

Down the other road lies the path to “normalisation” of global activity. While this road may not be smooth, if the third wave is the last one of the crisis there is a chance that, with the right policy support, the world economy emerges more balanced and therefore more stable and resilient.

EM slowdown is third and last wave of crisis –

US May Be on Verge of Another Housing Crisis

Fannie Mae and Freddie Mac, the two government-backed housing corporations bailed out seven years ago by federal taxpayers, reportedly may be headed for trouble again.

“Despite post-financial crisis pressure to reform, neither Fannie nor Freddie has done much to mitigate the risk to the American taxpayer inherent in government backing for these institutions,” CNS News reported, citing The Heritage Foundation.

Nobel laureate economist Robert Shiller of Yale University warns that the global economy continues to seek solid footing, and economic signs don’t look promising.

“We’re in a puzzling economy,” Shiller told Bloomberg TV. “This weak economy, it’s worldwide, and it might be a long-term malaise.”

CNS News: US May Be on Verge of Another Housing Crisis

Apocalypse now: has the next giant financial crash already begun? | Comment is free | The Guardian

A predicted global meltdown passed without event. But there are enough warning signs to suggest we are sleepwalking into another disaster

In short, as the BIS economists put it, this is “a world in which debt levels are too high, productivity growth too weak and financial risks too threatening”. It’s impossible to extrapolate from all this the date the crash will happen, or the form it will take. All we know is there is a mismatch between rising credit, falling growth, trade and prices, and a febrile financial market, which, at present, keeps switchback riding as money flows from one sector, or geographic region, to another.

So, the biggest risk to the world, despite its growing seriousness, is not the deflation of a bubble. It is the risk of that becoming intertwined with geopolitics. Any politician who minimises or ignores this risk is doing what the purblind economists did in the run up to 2008.

Apocalypse now: has the next giant financial crash already begun? | Comment is free | The Guardian

Just How Bad Was the 2009 Global Recession? Really, Really Bad – Bloomberg Business

“The 2009 episode was the most severe of the four global recessions of the past half century and the only one during which world output contracted outright — truly deserving of the ‘Great Recession’ label,” write Ayhan Kose, director of the World Bank’s Development Prospects Group, and Marco Terrones, deputy division chief at the IMF’s research department.

“The possibility of another global recession lingers in light of the persistently weak recovery, even though damage from the previous one has yet to be fully repaired.”

The 272-page book, “Collapse and Revival: Understanding Global Recessions and Recoveries,” underscores the challenges policy makers face as they try to jumpstart a sputtering recovery more than six years after the global financial crisis.

Just How Bad Was the 2009 Global Recession? Really, Really Bad – Bloomberg Business

NYT: An Exploding Pension Crisis Feeds Brazil’s Political Turmoil

Brazil reportedly is mired in a pension crisis of historic proportions. “Think Greece but more colossal,” one economist said in describing the chaotic impact on national finances amid a political struggle.

Brazil’s economy, the largest in Latin America, shrank over the past couple of quarters and is slated to contract this year and next, the country’s first back-to-back annual retractions since the 1930s. Households across Brazil are tapping their savings as accelerating inflation and rising unemployment are weighing down their finances, Reuters reports.

Brazilians retire at an average age of 54, and some public servants, military officials and politicians manage to collect multiple pensions totaling more than $100,000 year, The New York Times reported. Loopholes enable the spouses or daughters of retirees to go on collecting the pensions for the rest of their lives.

NYT: An Exploding Pension Crisis Feeds Brazil’s Political Turmoil

Global economy: Are we heading for a recession? – Fortune

Summers thinks the worrying economic data we are seeing is just the beginning of troubling economic times, because none of the factors contributing to what he has called “secular stagnation” are set to dissipate anytime soon. He argues that the only thing propping up the global economy since 2008 has been “the strength of emerging markets.” But investment there is quickly reversing course, finding its way back into developed bond markets, pushing interest rates even lower than they already are. Summers writes:

This is no time for complacency. The idea that slow growth is only a temporary consequence of the 2008 financial crisis is absurd. The latest data suggest growth is slowing in the United States, and it is already slow in Europe and Japan. A global economy near stall speed is one where the primary danger is recession.

In his op-ed, Summers argues that the wealthy world needs to take the lead in preventing this outcome, first by keeping interest rates near zero until there is a clear sign of inflation. More important, however, is to implement “expansionary fiscal policy,” or borrow at the low rates the global economy is offering governments like the U.S., Germany and the U.K. to invest in infrastructure.

Global economy: Are we heading for a recession? – Fortune

After all this time since the 2008 financial crash and the economic times are still looking bad. And of course the so-called experts are still rather clueless about what to do. Clearly, economists should be ashamed. Anyway, as I have been saying for a long time: Our economic problems will never get better unless there is a full decade-long depression. Depression is the solution, not the problem. Besides, we know a depression worked last time there were big economic problems.

Iran ministers warn of fresh economic crisis | The Times of Israel

Four Iranian government ministers have broken ranks to warn of a possible economic crisis because of the plunge in prices of oil and other commodities, underlining the country’s patchy recovery.

In a letter sent to President Hassan Rouhani that was published by newspapers Monday, the ministers of economy, industry, labour and defence said “incompatible” policies were causing harm.

“If urgent action is not taken, stagnation could turn into crisis,” the letter said, noting that capital was in short supply because of falling income from sales of oil, metals and minerals.

Iran ministers warn of fresh economic crisis | The Times of Israel

Congressman: In 12 Years, No Revenue Left to Fund Military, Roads – Washington Free Beacon

By 2027, all federal revenues will go to entitlement programs and interest on the debt, said Rep. Dave Brat (R., Va.) on C-SPAN.

“There won’t be a dollar left to run government, military, roads, education, all the things folks want,” he said, citing a report from the Congressional Budget Office.

“If we go up to that then we’re Greece, and I’m not a doomsayer, but you come up on that point and you’re Greece.”

Congressman: In 12 Years, No Revenue Left to Fund Military, Roads – Washington Free Beacon

China’s Coming Great Depression

China is on the road to its own Great Depression. The causes of our Great Depression are still hotly debated, but the best explanation comes from Friedrich Hayek, aided by the work of Milton Friedman: the depression was brought and prolonged by loose monetary policy in the 1920s, followed by a too-tight money policy after the initial bust. The misguided supply-side policies of Hoover and Roosevelt served to postpone the recovery further. China’s depression will stem from similar causes.

China’s massive over-indebtedness, which underlies its current slowdown, is the inevitable outcome of its easy money policy of the recent past. But China’s monetary policy is increasingly becoming far too tight, even as China’s central bank attempts to accomplish the opposite. Misguided supply-side policies will compound these problems in a lurch away from economic liberalization, toward increased state control of industry. Put all these factors together, and China heads into a depression.

To better understand, start with how China got into this mess.

China’s Coming Great Depression