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World Economy At Risk Of Another Financial Crash

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Debt is above 2008 level and failure to reform banking system could trigger crisis…

 

The floor of the New York stock exchange in September 2008. Photograph: Richard Drew/AP

The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms  needed to protect the system from reckless behaviour, the International Monetary Fund has warned.

With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said.

Much has been done to shore up the reserves of banks in the last 10 years and to put in place more rigorous oversight of the financial sector, but “risks tend to rise during good times, such as the current period of low interest rates and subdued volatility, and those risks can always migrate to new areas”, the IMF said, adding, “supervisors must remain vigilant to these unfolding events”.

A dramatic rise in lending by the so-called shadow banks in China and the failure to impose tough restrictions on insurance companies and asset managers, which handle trillions of dollars of funds, are highlighted by the IMF as causes for concern.

The growth of global banks such as JP Morgan and the Industrial and Commercial Bank of China to a scale beyond that seen in 2008, leading to fears that they remain “too big fail”, also registers on the IMF’s radar.

The warning from the IMF Global Financial Stability report echoes similar concerns that complacency among regulators and a backlash against international agreements, especially from Donald Trump’s US administration, has undermined efforts to prepare for another downturn.

The former UK prime minister Gordon Brown said last month that the world economy was “sleepwalking into a future crisis,” and risks were not being tackled now “we are in a leaderless world”.

Speaking this week before the fund’s forthcoming annual meeting – taking place next week on the Indonesian island of Bali – the IMF’s head, Christine Lagarde, said she was concerned that the total value of global debt, in both the public and private sectors, has rocketed by 60% in the decade since the financial crisis to reach an all-time high of $182tn (£139tn).

She said the build-up made developing world governments and companies more vulnerable to higher US interest rates, which could trigger a flight of funds and destabilise their economies. “This should serve as a wake-up call,” she said.

The stability report said the development of digital trading platforms and digital currencies such as bitcoin, along with other financial technology companies, had been rapid. It said:

“Despite its potential benefits, our knowledge of its potential risks and how they might play out is still developing. Increased cybersecurity risks pose challenges for financial institutions, financial infrastructure, and supervisors. These developments should act as a reminder that the financial system is permanently evolving, and regulators and supervisors must remain vigilant to this evolution and ready to act if needed.”

In a separate analysis, as part of the IMF’s annual economic outlook, it warned that “large challenges loom for the global economy to prevent a second Great Depression”.

It said the huge rise in borrowing by corporates and government at cheap interest rates had not shown up in higher levels of research and development or more general investment in infrastructure.

This trend since the collapse of Lehman Brothers, which triggered the global financial crisis, had limited the growth potential of all countries and not just those which suffered the most in the aftermath of the crash. It had also left the global economy in a weaker position, especially as it enters a period when a downturn is possible.

The IMF said:

“The sequence of aftershocks and policy responses that followed the Lehman bankruptcy has led to a world economy in which the median general government debt-GDP ratio stands at 52%, up from 36% before the crisis; central bank balance sheets, particularly in advanced economies, are several multiples of the size they were before the crisis; and emerging market and developing economies now account for 60% of global GDP in purchasing-power-parity terms – which compares with 44% in the decade before the crisis – reflecting, in part, a weak recovery in advanced economies.”

Like many institutions the IMF has warned that rising levels of inequality have a negative impact on investment and productivity as wealthier groups hoard funds rather than re-invest them in productive parts of the economy. Without a rise in investment, economies remain vulnerable to financial stress.

The Guardian



11 Comments on "World Economy At Risk Of Another Financial Crash"

  1. The last drop on Fri, 5th Oct 2018 9:19 am 

    Naah, a double click on the computer mouse from the CB, Fed will kick the can …don’t worry Rochead, ROCKKID, Merrico will explain it all away….honest

  2. Lucifer on Fri, 5th Oct 2018 9:51 am 

    The last drop, in just a few more years there will be no Fed to kick the can, or even a can to kick. Trust me i have seen where this story ends.

  3. The last drop on Fri, 5th Oct 2018 10:32 am 

    Lucifer, sure…it’s always a few years away…trust me….sarcasm

  4. Sys1 on Fri, 5th Oct 2018 1:11 pm 

    Just like in 2008, the game will be over when FED, ECB and other central banks will have to increase rates to cool down inflation coming from a +100$ oil WTI.
    But this time, contries won’t be able to save the day like 10 years ago. They are already indebeted from the bone to beyond the stars. No more capital to burn, no more kicking the can over the cliff.
    Prepare for civil war.

  5. print baby print on Fri, 5th Oct 2018 3:01 pm 

    Lucifer what do you mean by that ‘I have seen’

  6. Sissyfuss on Fri, 5th Oct 2018 6:27 pm 

    TPTB still have debt jubilees and the nationalizing of energy companies at their disposal. Doubt the sheeple will raise much of a fuss what with all those wolves in shepherds clothing surrounding them.

  7. makati1 on Fri, 5th Oct 2018 6:56 pm 

    Sissyfuss, the sheering is about over. The butchering will soon begin. The sheeple will be shocked and surprised, but the signs are everywhere if they could just ignore all of the ‘red herrings’ put in their path.

  8. Outcast_Searcher on Fri, 5th Oct 2018 10:55 pm 

    Lucifer and the voices in his head have seen the future. OK.

  9. Go Speed Racer on Sat, 6th Oct 2018 3:28 am 

    Seems like the next crisis will be fixed,
    in teh same way as before.
    Print money. Inflation.
    Bail out from the crisis by giving printed
    money to bankers and rich people.
    That’s what they always do. Just that this
    time, after all that inflation, a Big Mac
    will cost $22.50 and if you want a fries
    with that, it will be another $5.99

    But I’m just saying, that’s how they
    solve the crash every time. Why would it
    be any different this time. Save up your
    money so you can afford that hamburger.

  10. Cloggie on Sat, 6th Oct 2018 4:12 am 

    Sissyfuss, the sheering is about over. The butchering will soon begin. The sheeple will be shocked and surprised, but the signs are everywhere if they could just ignore all of the ‘red herrings’ put in their path.

    “Red herring” is good.

    Iamthemob=millimind comes to mind.

  11. Free Speech Forum on Sat, 6th Oct 2018 7:23 am 

    Americans are so retarded that they think the economy is bad because taxes are too low and there aren’t enough regulations and welfare.

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