Are We Heading towards another Crisis?

Is History Destined to Repeat Itself a Decade On?

Let me start of by answering my own question. Yes, I think we are hurdling towards another epidemic and I am going to tell you why.

For the previous 13 years the economy has been growing at a sloth-like rate and based on historic records, from the end of the Second World War, there is a trend of a financial crisis approximately every 4-10 years according to the Financial Times (https://www.ft.com/content/24f73610-c91e-11dc-9807-000077b07658). Despite the government's deficit level being considerably lower than what it was after it reached records levels just before the start of the new decade in 2010 (this is a good thing isn't it? well yes but no, there is always a downside and as the saying goes "opposites attract" -(Anon)) now the public debt has doubled that of the pre-crisis level which is hard to believe but its true, relative to the size of the economy. This had a major impact on household incomes with such a devastating hit to the UK economy.                                                                                                                                                 

I have done some of my own research and I found that the GDP (national income) was 11% higher at this point in time than it was at its pre crisis peak in 2007–08. As a result the economy was 16% (or £300 billion in monetary terms in order to give us a better understanding of how the economy is working) smaller than it would have been had it followed the pre-crisis trend. GDP per capita was then £5,900 per person lower than it might have been had pre crisis trends continued.

We are now 13 years on from where the crisis initially started in the USA meaning this is the longest period of time the USA economy has gone without a recession and not to sound too depressing but doesn't this give you the impression that we are right around the corner from the next one? It could just be me with the "glass half empty" kind of attitude but at the same time it is hard not to see the realistic side of things and prepare ourselves mentally (and monetarily if we are being smart about this) for harder times ahead. Am I wrong to suggest such a dark thought? 

Approaches taken to Combat the 2008 Crash.

Macroprudentials

In the late 2000s after the 2008 crisis began having a domino affect all over the globe there was a macro prudential regulation put in place in order to tackle the poor supervision and regulations previously implemented by the banks in the hope of mitigating the risk to the financial system as a whole as there was a growing consensus among policy makers for the need to reorient previous
regulatory framework towards a new macro prudential perspective.

What are Macroprudentials?

Source: Magyar Nemzeti Bank

Why is the macroprudential regulation necessary? The necessity for the macroprudential comes from the risk of further inflation in the economy and macroeconomic costs of financial stability. It was essential to employ a macroprudential regulation to fill the void negated between the macroeconomic policy and the traditional microprudential  regulation of the financial institutions of the former.

There are two pillars under the financial regulations functions: 1. Prudential Regulation and 2. Financial Conduct. The Prudential Regulation pillar includes the directorates for credit institutions; insurance; and asset management supervision all of which is designed to ensure the financial institutions are suitably equipped to deal with the required regulatory mandates.

Why was a Macroprudential Regulation Essential in the Survival of Banks?

Macroprudential regulations limited the system-wide distress across the world with its ultimate objective of avoiding Gross Domestic Product (GDP) costs from increasing and staying at such high figures which would result in the downfall of more banks and financial institutions had this continued without the intervention of Macroprudential regulations.

Macroprudential policies also include counter cyclical capital requirements which means financial institutions are forced to hold more capital during "booms" aka "the good times" which eventually leads to reduced lending/borrowing and helps mitigate credit bubbles that later can possibly cause havoc to the economy, essentially building a buffer for the future so we don't have a repeat quite like this one. There is theoretical and empirical evidence to back up the long-term economic growth effect of this regulatory method and I believe that the majority of the post-crisis banking regulations are aimed at the banks in the European Union in an attempt to restore stability according to Chaikovska (2019), which is what Europe needs after long periods of uncertainty.

What Caused the 2008 Recession?

Source: The Balance.com

How Did this Epidemic Start?

"A picture speaks a thousand words" - Anonymous. I am going to add to this picture not with another one but with context.

Initially, the recession began in 2006 after the subprime mortgage crisis erupted when the Bush Administration and the Federal Reserve took no heed of the warning issued to them. With the home permits being down 28% compared to the previous year you would like to think that those in power were more than capable of comprehending what was happening or could possibly happen. Obviously not.

Ignoring the decline in the inverted yield curve... (which I'm sure you can guess is not a good thing). If you were in charge of USA, do you think a strong money supply and low-interest rates would solve all the problems they've brought upon themselves? Somebody did anyway.

What factors influenced the Crisis?

To sit here and say that all of the problems were entirely caused by one factor would be unfair to say the least, there are multiple factors which contributed to the recession. One man who believes there was a "catastrophe" avoided similar to that of the 1930s, is David Drezner who published his book "The System Worked: How the World Stopped Another Great Depression" explaining how we did not completely avoid the crisis altogether but it could have been worse if it wasn't for quantitative easing (meaning the federal reserve bought bonds preventing the economy from imploding; Source: https://www.newyorker.com/magazine/2018/09/17/the-real-cost-of-the-2008-financial-crisis) which is hard to imagine.

Chaikovska (2019) has stated that "The recent financial crisis has exposed to weaknesses the area of banking regulations and supervision", for example, the liquidation of $24 billion by the federal reserve into the banking system which is regulated and only under certain circumstances can this be done. Printing money can be dangerous and requires intense supervision because history tells us that without regulation and supervision hyperinflation can occur as demonstrated by the Weimar Republic of Germany when the printed money 1921-23. Relaxed lending standards which I am sure were never meant to be so sloppy which impacted on household debt and bursting that real-estate bubble all of which could have been helped with more stringent bank regulations and supervisions but here we are 13 years later.

From 2000-07, the global pool of fixed-income securities increased to $80 trillion from $36 trillion. This kitty continued to increase as savings from high-growth developing nations entered the global capital markets, prompting investors began to search for higher yields than those in the USA. The greed, or temptation whichever way you want to describe it, became overwhelming as policies and regulatory control mechanisms were completely disregarded as lenders and borrowers put their savings to use causing bubbles to burst and banks to collapse. The moral of the story is, do not lend people money who you deem to have questionable integrity.

Would you lend a person money who had a poor credit history and was liable to default on their payments all for a quick profit? No, me neither.

What are Banking Regulations and Supervisions?

The Crash of 2008

Growing up we have all experienced restriction or been under supervision in one form or another either at home with our guardians or from our teachers at school, and the life in banking is no different. Different cities, continents, countries and states each have a different policy on how their banks should operate to create a transparency between the banking institutions and those whom they conduct operations with, for example, individuals and organisations.

Why Do we have Regulations and Supervisions?

Financial performance is measured to eradicate any foul-play and risk, Summer (2003) describes the control of systematic risk as "one of the main arguments for banking regulations", which is not so uncommon among the elitists who sometimes believe they are untouchable.. we will find out more later on in the blog. The supervision carried out by government regulators ensures a safe operating space among banks around the world.

Source: The Balance; Financial Crisis

Yes. We are going there. I am talking about the crash of 2008. I know most you do not want to revisit those terrible times mostly for our parents and grandparents sake (as we were too young to feel the financial impact directly) but this does not mean that, like many others, I did not feel any feel any repercussions of the decisions made by those in charge. It started with the Lehman brothers filing for bankruptcy 15 September 2008, the biggest since records began all the way down to your everyday average man, woman, aunt, uncle, brother, sister, husband, wife and family.. you get where I am going with this basically everyone - no one escaped this disaster unscathed.

Bankers pre 2008

The stats provided in the picture above give you somewhat of an understanding as to just how detrimental this market crash was
and it may not even do the crisis justice - it is only a snapshot!

Could the Crash have been Prevented?

This crisis hit the rich hard and poor even harder all because the regulations put in place were not followed and supervised as originally intended to prevent such events - national banks are required to be members of the Federal Reserve System (FRS) and

Bankers post 2008

regulated through the Office of the Comptroller of the Currency (OCC). The FRS is the supervisor for most large banking institutions as they are the federal regulators for Bank Holding Companies (BHC).