The International Monetary Fund has urged policymakers to act now against a growing global housing bubble and warned that inaction could lead to another crisis.
House prices have recovered across the world in the years since the start of the global financial crisis, but some commentators have expressed concern that the market is starting to overheat and enter bubble territory.Sponsored Ads
With the 2008 financial crisis is still fresh in the mind of many investors, it would appear that the world is setting itself up for another collapse. However, this time it could be much worse.
A seven-year high
One of the root causes of the last financial crisis, was the use and availability of collateralised loan obligations, or CLOs for short. CLOs are bundles of loans packaged together as one tradeable security, designed to help boost returns for yield-hungry investors.
Now, in theory, these CLOs are safe, if the loans used to construct them are high quality. Unfortunately, as investors are increasingly searching higher returns, lower-quality loans are being used within CLOs for their higher interest rates.
As a result, sales of CLOs have boomed during the past few months hitting a level not seen since May of 2007, just before the financial crisis took hold. Unsurprisingly, this puts banks with the biggest investment banking divisions at risk, Barclays (LSE: BARC) (NYSE: BCS.US) in particular.
Fiscal Folly: A new study says governments around the world boosted their debts by more than 40% to over $100 trillion in response to the global financial crisis. Where’s the promised recovery from all that spending?
From mid-2007 to last summer, the world added $30 trillion in government debt to its balance sheets, the Bank for International Settlements says. By comparison, that’s twice the size of the $15 trillion U.S. economy.
After the financial crisis, governments around the world, but especially in Europe, the U.S. and Japan, went deeper into debt so that they could spend more. They were following the old Keynesian nostrum that more government spending ignites the flame of economic growth.
Was the global financial crisis triggered on purpose?
Since infamous “Black Thursday” of 24th October, 1929 which led to the Great Depression of the 1930s one knows the far-reaching consequences a stock market crash can have. Today, it is claimed more and more often that the economic breakdown of the 1930s was caused by the nature of the capitalistic economic system itself that always generates speculation bubbles which burst finally, especially when capitalistic greed gets out of control. As a solution for this problem generally a more or less state-directed economic curtailment of the free market is demanded. The belief grows that socialism should solve the problems which supposedly capitalism has caused. However, there are also voices which claim that the breakdown of the global economy in the 1930s was not a failure of the market economy, but rather an act of deliberate sabotage. Furthermore, these voices claim, it was only because of Stalin’s strategic incompetence that Moscow wasn’t able to use this opportunity for triggering a communist revolution, considering the huge social problems in Germany and America that were caused by the Great Depression. It is supposed that, if Trotsky had been in power at that time in the Kremlin instead of Stalin, world history would have taken another course. However, although the global revolution didn’t break out then, the global economic crisis created the political conditions for the Second World War – with all its catastrophic results.
Did capitalism fail?
”If productivity does not improve in 2014, then it is more than likely that the crisis has done permanent damage to the economy, and the 7 per cent unemployment threshold will be reached more quickly than the bank currently expects.”
The Office for Budget Responsibility’s Economic and Fiscal Outlook, released this month, says productivity growth is critical to a sustained recovery.
It also notes that it cannot explain the reason for the abrupt fall and therefore it is difficult to judge the timing or quantum of productivity increases.
The US is in the same boat: A Permanent Slump? | NYTimes.Com | 1913 Intel
Japan’s economy has been permanately damaged. Now Italy is worried about the same future.
The absence of such outbursts of popular anger in Italy can be explained partly by the savings cushion built by previous generations. But there are also deeper social and political forces at play – forces that threaten to push Italy, like Japan after its asset-price bubble burst in 1990, toward silent decline.
Japan’s experience – characterized by more than 20 years of economic stagnation – offers important lessons for crisis-stricken democratic countries with aging populations. During Japan’s “lost decades,” successive Japanese governments allowed public debt to skyrocket and refused to confront the economy’s deep-rooted problems, allowing sclerosis to take hold.
The reason for these problems is given here (and the solution at the end): A System Collapse Framework for Societies | 1913 Intel. The solution is actually easy but very painful. Just let it collapse. No collapse means a permanently damaged economy.
Five years after the collapse of Lehman Brothers, economists are warning the worst fallout from the global financial crisis is yet to hit Europe and parts of Asia.
He says the economy – and broader society – is yet to recover from the Lehman Brothers collapse.
“Never before in history have we had this level of monetary stimulation ,and for growth to be so disappointing,” he said.
“The growth response to the level of stimulation says to me that the old linkages that we expected are broken.”
The Swiss-based ‘bank of central banks’ says a hunt for yield is luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.
This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.
“This looks like to me like 2007 all over again, but even worse,” said William White, the Bank for International Settlement’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.
SPIEGEL: Ms. Ghosh, when the global financial crisis broke out in 2008, the demise of the West seemed to be sealed. Now, however, China is suffering from a banking crisis, and in India the situation is even more dramatic. Economic growth has almost halved, and panicking investors are abandoning the rupee. Is the Asian Era over before it has even begun?
In a society composed of elites commanding the economy with people acting as bricks and materialism acting as mortar, what holds it together when things start faltering? What happens to materialism in a faltering economy?
First, let us see how China is starting to falter:
The Politics of a Slowing China by Minxin Pei – Project Syndicate
Slower GDP growth undermines elite unity according to a different political dynamic. The current Chinese system is a gigantic rent-distributing mechanism. The ruling elites have learned to live with each other not through shared beliefs, values, or rules, but by carving up the spoils of economic development. In a high-growth environment, each group or individual could count on getting a lucrative contract or project. When growth falters, the food fight among party members will become vicious.
Trouble in Emerging-Market Paradise by Nouriel Roubini – Project Syndicate
This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. Indeed, China’s slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, “unstable, unbalanced, uncoordinated, and unsustainable,” and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa. The risk that China will experience a hard landing in the next two years may further hurt many emerging economies.
China’s End of Exuberance by Michael Spence – Project Syndicate
China’s growth has slowed considerably since 2010, and it may slow even more – a prospect that is rattling investors and markets well beyond China’s borders. With many of the global economy’s traditional growth engines – like the United States – stuck in low gear, China’s performance has become increasingly important.
China Grows Down by Andrew Sheng and Xiao Geng – Project Syndicate
For more than three decades, China’s GDP has grown by an average of more than 10% annually. But former Premier Wen Jiabao rightly described this impressive growth performance as “unstable, unbalanced, uncoordinated, and unsustainable,” highlighting the many economic, social, and environmental costs and challenges that have accompanied it. Now China must choose between the export-based, investment-driven growth model of the past and a new, more viable economic order.
The following story about the Tower of Babel comes from Rabbi Daniel Lapin and is told by Glenn Beck. Here we learn the meaning of stones, bricks and mortar.
The Tower of Babel like you’ve never heard it before
So what is the brick? Bricks especially I live in Connecticut. Stones, those great stone calls, they’re all different and they are all made by God and they are all made differently. And when you build these stone walls or a foundation, all of our churches back in colonial days, they weren’t bricks. They were all stones. Stones are all different and they are all made by God. The stones represent people. So do the bricks. Nimrod says let’s make bricks. He’s talking about people, let’s make them all equal, let’s make them all exactly the same. Because then everybody is equal, everybody will have the same and they will be interchangeable. And what did they use as mortar? In the ancient Hebrew, mortar, the word “Mortar” actually means “Materialism.” So materialism. It’s what holds the bricks together.
Socialism (modern liberalism) and communism turn people into bricks by making everyone the same, or at least no better or worse off than any other. Obviously, in communist China the elites treat much of the population likes bricks. But the introduction of capitalism plus heavy state control by the elites has turned China into a fascist state. Fascism plus the people as bricks and materialism as mortar holds China together.
National Socialism with Chinese Characteristics – By John Garnaut | Foreign Policy
Two years ago, one of China’s most successful investment bankers broke away from his meetings in Berlin to explore a special exhibit that had caught his eye: “Hitler and the Germans: Nation and Crime.” In the basement of the German History Museum, He Di watched crowds uneasily coming to terms with how their ancestors had embraced the Nazi promise of “advancement, prosperity and the reinstatement of former national grandeur,” as the curators wrote in their introduction to the exhibit. He, vice-chairman of investment banking at the Swiss firm UBS, found the exhibition so enthralling, and so disturbing for the parallels he saw with back home, that he spent three days absorbing everything on Nazi history that he could find.
In china, we are looking at a combination of both national socialism and fascism.
Can China Be Described as ‘Fascist’? – NYTimes.com
Chinese politics is controlled by the Communist Party and its powerful families and factions, so when the son of a former party chief says the state is virtually “fascist,” it’s worth listening.
“The signs have long been there,” said Wang Lixiong, a prominent writer and scholar. “I feel there is a very clear trend toward fascism, and the source of fascism comes from the ever-growing power of the power holders.” China is “a police state,” he said, where power rules for power’s sake.
From the history of Nazi Germany and the Tower of Babel, we should probably be thinking about rough waters ahead now that China’s economy is faltering.
“The global financial crisis that began in the United States in the summer of 2007 was triggered by a bank run, just like those of 1837, 1857, 1873, 1893, 1907 and 1933.” That’s the theme of Yale economist Gary Gorton’s Misunderstanding Financial Crises, Why We Don’t See Them Coming, published last year by Oxford University Press. Students of financial crises will tell you that Gorton’s theme is highly relevant to the next meltdown we could face someday soon.
The last crisis five years ago was a systemic one “triggered by a run on repos and on asset-backed commercial paper,” says Gorton. Frightened players in financial markets who had lent vast sums of money short-term, desperately wanted to retrieve their money pronto from the banks to whom they had lent it.