World economics: Ten years on from the big crash

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Our financial expert Dave Deruytter looks back over the decade and into the future for world economics.

We are ten years on from the financial and economic crisis of 2007. Are we finally out of the woods, or is a new, bigger crisis brewing?

Ten years ago, Lehman Brothers went bankrupt and the worst financial and economic crisis since the Wall Street crash of 1929 hit us all. Excessive lending to the private housing market in the US was a direct cause: sub-prime loans proved to be really sub-sub-sub-prime. The world economy went through a dark period for a few years. Greece almost went bankrupt and there were very serious issues with many banks. Countries such as Portugal, Ireland and Spain saw economic circumstances deteriorate fast, resulting in, among other things, high unemployment, particularly among young people.

Many countries had to rescue their banks to save world economics. Central banks lowered their interest rates to below zero and started programs to buy financial assets on a regularly basis to inject massive liquidity into the financial markets (Quantitive Easing: QE). Even the super economic growth engine of China came temporarily to a standstill.

Luckily the massive concerted efforts by countries and central banks stopped the haemorrhage. New rules for banking were defined (Basel 3). Banks had to prop up their capital, improve liquidity and now face regular stress tests. Greece was rescued a few times in quick succession As a result, from the outside one can say that the world economy and the financial system today is in good shape, at least in a better shape than ten years ago.

Still there is no room for complacency. Recently, we have seen rescues of banks in Southern Europe again. In the EU, big banks are still far too big compared to GDP. In China, the excessive lending has shifted from the banks to shadow lenders. In the US, study borrowings and credit card debts are far too high to be sustainable in the future. Japan has never really overcome its 1990s real estate bubble and has a very high total debt ratio. Many countries in continental Europe face a serious pension crisis and are highly indebted – plus they are running budget deficits.
All in all, we haven’t reformed or restructured the way of doing business, the way of governing and financing enough to be safe for the next even bigger crisis.

It is good that the Federal Reserve, the Central Bank of the US, is planning to reduce its now enormous balance sheet of financial assets (QE assets). The plan sounds feasible. The Fed would simply not replace maturing debt. If they were to sell financial assets outright, interest rates would go up too fast or instability might occur. We will have to see how all of this goes and hope that the European Central Bank (ECB) will follow suit one day. The ECB is currently still buying billions of euros in financial assets per month under its own QE program. One would like to see that amount of buying being reduced and eventually stopped. Only then can the reduction of the massive QE assets the ECB holds begin.