Frances Everett, BA International Relations and Development Studies
Financial analysts are beginning to predict the next global financial crisis just ten years after the worst financial downturn in history.
According to the Bank of England, an economic crisis is an inevitability, so financiers are keen to know when the next one should come about. The Bank also says that history shows us the next crisis will not be the same as the last. This is why strategists and analysts at the multinational investment bank JP Morgan have been trying to predict when, and how, the next crisis will arise.
The coming crisis is thought to be arriving at some point next year, and will possibly lead to US stock sliding 20% as well as a 35% decrease in energy prices. It appears that emerging markets will fare the worst with a predicted 48% slide in emerging-market stocks.
Marko Kolanovic, a strategist at JP Morgan, predicted that the crisis could be sparked by ‘flash crashes’ which describes a situation in which stock is suddenly sold off by computerised trading systems. These ‘mechanical investors’ are programmed to sell stock based on certain signals, for example, if the market drops by 2% then the stock will be sold. Kolanovic predicts this trend of mechanical investors means that the market is more prone to volatility, and that market declines can happen sharply and without warning.
This news comes only months after we saw the anniversary of the collapse of the investment bank Lehman Brothers, the spark that lit the flame of the 2008 global financial crisis which saw stock markets plunge all around the world.
“there is concern that this time around such a bailout will not be possible in order to save these institutions deemed ‘too big to fail’.”
Governments were able to cushion the blow to some extent in 2008. The US bailout of failing institutions, such as the multinational finance and insurance corporation AIG which cost around $150 billion for the American taxpayer, helped to diminish the painful consequences of the crash. However, there is concern that this time around such a bailout will not be possible in order to save these institutions deemed ‘too big to fail’. The reason for this is a lack of financial market liquidity since 2008 which, according to JP Morgan analysts, would eliminate “a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.” As a result, governments may not have the cash available to bail out these companies. This has been described as the liquidity ‘wildcard’ by JP Morgan strategists, as this is where the real uncertainty regarding the probable crisis lies.
There is also some uncertainty with regards to the length of the resulting recession: this will be dependent on how hard markets are hit as well as how far governments are prepared to intervene in an attempt to stabilise the economy.
Despite these uncertainties, experts claim that this crisis will not be as severe as the last. JP Morgan strategists wrote that, “Across assets, these projections look tame relative to what the GFC (global financial crisis) delivered and probably unalarming relative to the recession/crisis averages”.
The question remains as to how this coming crisis will affect regular people, rather than just how it will affect stocks and corporations. Falling incomes and unemployment affected millions after 2008. The curveball thrown by the liquidity issue means that it is impossible to predict the severity and length of the next crisis, and how harsh its impact may be. Although it is supposedly going to be less painful than the last, the winners and losers of the next crisis very much have yet to be decided.
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