Governments, central banks and companies must cooperate if new financial crisis hits

By Frank-Jürgen Richter Source:Global Times Published: 2019/4/29 21:01:02

Illustration: Luo Xuan/GT

A new global economic crisis might be on the horizon. Global growth remains very soft and the world's largest companies are revising their growth figures and holding back on investments.

Unilateralism, fragmented regulatory bodies and a depleted arsenal of tools for reviving economic growth will mean that the next recession is likely to be more prolonged and more devastating.

There are multiple reasons why the next crisis will be far worse than the crisis of 2008. 

The rise of nationalism and isolationism will lead to less cooperation among nations than we saw in 2008, exacerbating the negative effects of a global financial collapse that requires international cooperation to remedy. 

In addition, in the 2008 financial crisis, China remained relatively unscathed. To be fair, China's economy is showing the first signs of recovery after months of slowdown, as stock and commodity rallies lift confidence. Markets were boosted by monetary easing and the breathing room offered by the now-extended trade truce with the US. China's fundamentals are still strong. I am cautiously optimistic. 

Also, China retains advantages in funding its longer-term growth imperatives such as urbanization, investment in infrastructure, human capital, research and development, and the shift to indigenous innovation, notably artificial intelligence. 

Nonetheless, with the Chinese economy highly integrated into the global economy, the nation is inevitably exposed to global headwinds.

Furthermore, the general public and, more precisely, the middle classes in Europe and the US no longer trust their governments. There is a general lack of national, regional and global leadership. A deep-seated resentment of globalization is boiling over worldwide. A great portion of the world perceives itself to be globalization's losers. This resentment is exemplified by the "Yellow Vest" protests in France. US President Donald Trump's rise is also partly based on this resentment - he was mostly elected by globalization's losers.

Still psychologically scarred, few were keen last month to commemorate the 10th anniversary of the Dow's rock bottom close in March 2009. 

Even so, all month long, calls to heed lessons from the last financial crisis  echoed across the media as ominous signs pointing to another pending financial crisis loom. 

We can, however, dispense with platitudes about remembering the past or being doomed to repeat it. The fact is we aren't set to relive a financial crisis like that of 2008. The next crisis is likely to unfold in a manner fundamentally different from the last one.

Few experts would claim regulators have implemented sufficient protections against the banking practices culpable in the 2008 crisis. But even if we had learned from past mistakes, the financial institutions and instruments requiring oversight are evolving at an unprecedented rate, becoming increasingly complex.

Regulation is equally ill-prepared to oversee many innovative financial instruments reshaping the industry. Fintech platforms, which determine credit-worthiness through algorithms rather than credit scores, are often not subject to the same rules as banks, and may often operate in the absence of interest rate limits altogether.

Global regulatory bodies remain far too fragmented. The US, for instance, has three federal bank regulators and two market regulators that often compete instead of cooperating. Meanwhile, the vice chair of the supervisory board of the European Central Bank admitted last year that Europe's regulators remain too fragmented to effectively supervise.

Moreover, post-2008 calls for central banks to play a more vigilant role have paradoxically led them to focus inward and neglect collaboration at the international level.

This lack of communication and collaborative action hinders regulators' ability to police practices - and when the next crisis occurs, these disconnects will impede attempts to mitigate damage.

In 2009, collaboration helped avert disaster as G20 nations pledged to borrow and spend what they could, and to abstain from new tariffs. But today's political landscape is characterised by discord and economic nationalism - and joint action seems far less likely. Without communication and concerted action, the next crisis is likely to prove far more intractable.

Central banks and governments must share information and align strategies. They must once more promise not to push up tariffs or depreciate their currencies. If, at the moment of crisis, politicians will be too wary to support fiscal stimulus, governments should work together now to devise mechanisms to automatically trigger spending increases at the onset of turmoil. Also, to help maintain sufficient demand, governments should work with private firms to make wage increases of 5 to 10 percent manageable.

The author is founder and chairman of Horasis, a global visions community.


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