ANALYSIS - Get ready for the next financial crisis

ANALYSIS - Get ready for the next financial crisis



03/05/2018

Economy News Baghdad:

Global monetary policy has continued to be "super-facilitative" for many years, but it is now trapped in a trap for its own debt .

According to an analysis published by the Financial Times for the chairman of the Committee for Economic and Development Review of the Organization for Economic Cooperation and Development, "William White," that must prepare for the financial crisis coming from now .

Central banks in the United States, the United Kingdom, Canada and South Korea raised interest rates, with a move to cut stimulus programs in the euro area and Japan as economic growth recovers .

The continuation of the current monetary course is ineffective and is increasingly risky, but any opposite direction also carries significant risks and therefore the likelihood of another crisis continues to rise .

Threats to the global economy

It is noted that the move forward in the current monetary policy coincides with the risk of inflation, and due to the lack of experience of economists on the level of "probability" or the process of inflation itself, it may easily lead to a break from control .

Inflation, however, is not the only danger. First, debt rates are allowed to rise for decades even after the crisis. In addition, before the crisis, debt was primarily a problem of developed economies but a global crisis .

The second risk is that tolerance of risk approaches threatens future financial stability and reduces the profit margins of many traditional financial institutions .

While the third risk is to encourage the monetary policy environment to misallocate real resources from banks and other financial institutions .

The actions of central banks have led to the inability of markets to allocate resources properly, which has increased the likelihood that debt obligations will rise sharply .

Regrettably, the normalization of monetary policy also carries great risks. It is clear that the strength of the global economy will push upward inflationary pressures and thus lead to tightening monetary policy, which may have destabilizing effects .

The unintended consequence of regulatory reforms was to reduce market liquidity even in the absence of inflationary pressures, as financial markets may interact at random with signals of stronger growth .

The sovereign bond yields in developed countries are at historically low levels and are set to reverse, and if started to go in the opposite direction, this could have significant implications for the excessive prices of many other assets .


What do we do in preparation for the crisis?


But the question is, what action should policy makers take to prepare for this outcome in advance? Local governments and central banks, in cooperation with international organizations, should negotiate memorandums of understanding on who does what in crisis .


Measures to ensure adequate levels of liquidity to stabilize markets and the financial system are also necessary .


As in the United States, many provisions of the Dodd-Frank Act, adopted in the aftermath of the financial crisis, would hamper the Fed's attempts to provide both domestic and international liquidity .


Perhaps most important is the need for governments and international forums to review bankruptcy proceedings. The irrevocable debt will not be granted. Governments must enact legislation to ensure that this happens in as orderly a manner as possible .


The restructuring of sovereign debt is also insufficient .


It is now necessary to take action to reduce the possibility of intra-market turmoil during the next downturn .


Early action is likely to help resolve the accumulated debt problem and may reduce the likelihood of this contraction .


These monetary policies may provoke the turmoil we want to avoid, but it is always better to prepare for the worst and hope for the best .

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