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.