Fed Said to Be More Unprepared For Crisis Than 10 Years Ago
A group of current and former policymakers and academics in the financial industry that comprise the "Group of 30" - a financial industry working group that includes names like Mario Draghi and Mark Carney and which is the "who's who" of economists and experts that led the world into the last financial crisis - has come to the same conclusion that the many in the "fringes of economic thought" have been warning about for the last decade: the Fed is going to be in worse off shape to fight the next major crisis than they were in 2008.
“Some of the tools to fight the hopefully rare but extreme crises in the future have been weakened,” Tim Geithner, a distinguished Group of 30 member, told Bloomberg.
While many of our readers have likely arrived at that same conclusion on their own, the reasoning by the Group of 30 seems to differ somewhat from conventional skepticism. More importantly, how could the world be "unprepared" nearly a decade after the great recession, and with new reforms being put into place as a result of the financial crisis?
According to Geithner, new reforms are actually part of the problem. Geithner tells Bloomberg the unease is a partially a result of "Congress limit[ing] the ability of the Federal Reserve and the Federal Deposit Insurance Corp. to provide emergency support to the financial system".
Mexico’s former central bank head Guillermo Ortiz started to hint at the right idea when he told Bloomberg that "The next financial crisis will likely come from a new source". But that new source, according to Ortiz, is not the biggest debt load ever seen in the history of the world, but will be due to... cybercrime.
"Central banks and supervisors may not be placing enough emphasis on preparing," he continued telling Bloomberg.
Meanwhile, as policymakers confirm that they believe the next crisis is going to be "different", it still doesn’t seem as though anybody has considered the idea of the alarm going off from inside the U.S. as a result of a potential hyperinflationary or currency based crisis.
Au contraire, these grizzled experts believe that the problem is that they won’t be able to inject dollars into the system fast enough – just the opposite. Further, policymakers believe that the enhanced regulation on banks has likely simply left them playing whack-a-mole and pushing much of the nefarious behavior to the shadow banking system.
"If you apply constraints on risk taking to only part of the financial system -- say just the banks -- and allow other types of financial institutions to operate outside those constraints then you will leave the overall financial system less resilient. Banks themselves may look more stable but their role in the system will shrink over time," Geithner continued.
For once, he's right: just ask China and its years-long attempt to rein in China's giant shadow banking system without causing a financial crisis in the process.
Yet for some reason these "smartest people in the room" continue to believe that if we can’t govern all of the institutions that deal in finance, somehow the better option is only to govern some of them, instead of letting them all do business under a free market scenario (that outcome would require the end of central banking and modern economics which may explain their skepticism).
Even more amusing is the fact that much of the camaraderie formed by international regulators over the financial crisis as a result of them coming together to solve the problem also looks like it could be on its deathbed.
G-30 member Axel Weber says that confidence between regulators may not last another decade "In a world where inward-looking policies are starting to emerge, and where economic and trade tensions are starting to become the day-to-day in politics."
In other words, for those who believe that the biggest scourge on the face of the ear are central banks and glorified academics running the world, the collapse of globalization may just be the white knight they have been waiting for. Perhaps in retrospect, something good will come out of Trump's presidency after all...
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