The financial system of chaos: no one can tell the 'when', 'where' and ‘how’ of the next financial meltdown
In
previous article we wrote
that, the last mutation of capitalism, which has started about four
decades ago, appears to contain the tools of its final demolition.
Financial capitalism, accompanied with the corresponding neoliberal
ideology, created a deeply unequal and unstable system.
Another
study
by The Democracy Collaborative comes to confirm that we live
in the most unstable times, where financial crises become more
frequent and more devastating. According to the study:
It
appears that, contrary to the great moderation theory, the occurrence
of financial crises has been accelerating in the neoliberal era.
An
important 2001 paper by a number of economists from Rutgers,
Berkeley, and the World Bank found that "since 1973 crisis
frequency has been double that of the Bretton Woods and classical
gold standard periods and is rivaled only by the crisis-ridden 1920s
and 1930s. History thus confirms that there is something different
and disturbing about our age."
Similarly,
in 1999, a decade before the 2008/09 crisis, Nobel Prize winning
economist Joseph Stiglitz maintained that "over the last 20
years, financial crises have become more frequent and more costly."
And in
the 2011 edition of the classic institutions work Manias, Panics,
and Crashes, the late economic historian Charles Kindleberger and
economist Robert Aliber wrote that "despite the lack of
perfect comparability across different time periods, the conclusion
is unmistakable that financial failure has been more extensive and
pervasive in the last thirty years.”
With
ever larger and more complex financial institutions, and no
indications that the industry’s behaviors, outlook, or incentive
structures have been fundamentally altered by the experience of 2008,
when the next big crisis arrives it may well be even more difficult
to contain and rectify than the last.
A review
of the various reform proposals suggested or implemented over the
past ten years suggests that the unchecked political-economic power
of the large financial institutions has essentially overwhelmed
attempts to regulate or constrain the sector.
By
blocking any serious changes in the industry, these powerful
institutions have made it impossible for public authorities to limit
the risk of another financial crisis, or effectively mitigate the
potential damage such a crisis might inflict.
In other
words, we can only guess that the next financial meltdown will erupt
in the most deregulated area, where public authorities have zero
power in supervising the financial sector. In our days, this area is
the US by far. Europe maintains a level of regulation, yet it is
closely interconnected with the US financial sector and therefore
another contamination could be easily transferred from the US. This
is exactly what happened in the 2007-08 big crisis.
Furthermore,
despite the crisis of 2007-08, Europe has not learned its lesson.
Instead of strengthening supervision on the financial sector it goes
to the opposite direction, following the US model. And the reason is
quite simple. It's because Brussels bureaucrats have been bought by
the financial sector lobbyists.
It
appears there is a small probability for the next financial crisis to
erupt in areas with heavy regulation, like China, which is also the
stimulator of the global economy for the moment.
However,
in our days, the financial system is so interconnected globally that
it's almost impossible to predict the 'when', 'where' and 'how' of
the next financial meltdown. Will it start from the student debt
bubble in the US? Will it start from the zombie-bank Deutsche Bank in
Europe? Will it start from another real estate bubble, this time in
China? Will it come from something else, elsewhere? No one can tell.
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