Posts Tagged ‘risk’

It’s taken more than six years after the beginning of the last financial crisis for the US to finally implement some of the regulations that became glaringly necessary when the financial system began to implode at that time. The Volcker Rule, along with Dodd-Frank legislation, are a start towards the kind of systemic regulation the financial system here requires to keep it in line.

Unfortunately, the regulations are too limited in scope to keep problems in the U.S. from reaching crisis proportions, let alone spreading overseas. As Gordon Brown points out in an Op-Ed in the New York Times, the lack of regulations to restrain global financial corporations operating overseas and markets in the developed and developing world all but ensures that we will visit Global Financial Crisis 2.0.

I wrote about this more than four years ago for the New York Society of Security Analysts in a piece entitled Mending the Seams: International Regulatory Reform. In the intervening years, a few things have changed, but not much. On a global basis, rules governing everything from systemic risk to derivatives to accounting standards to hedge funds vary widely as does enforcement of those rules.

Even if the rules were consistent, financial services companies can escape regulation by moving certain operations to different jurisdictions. There’s still the propensity of the right hand to have no clue what the left hand is doing, as alleged “rouge” traders engage in mind bogglingly risky behavior.

What is the scariest is the risks that we don’t even know about. The last crisis proved that the lack of foresight into risky activities was endemic, from the ones that seemed, in hindsight to be the most obvious, to other obscure risks that few even comprehended were risky.

If Bank of England economist David Miles is right, the next financial crisis will happen sooner than we think. He predicts one every seven years. It could happen, or not. The system could stumble along for another few years, fueled by loose money and a return to economic growth.

While the developed world and the global economy may be growing at a higher rate, one thing that hasn’t really changed is the lack of global stability. And that’s what’s going to come back to haunt us.

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I’m a bit late to the party on this, but here goes: last week the St. Louis Fed released its U.S. Recession Probabilities chart, which shows the risk of a U.S. recession near zero. I’ve been following the progress of the U.S. economy pretty closely for the past couple years as it has struggled to emerge from the Great Recession and gain a more steady footing, so I’m finding this assessment interesting.

While I believe that the risk of recession is less than it has been in the past few years, I wouldn’t say that it is near zero. Although the recovery does seem to be gaining more traction, that’s happened before. The last couple of Springs, the economy will seem to firm up on a couple of different fronts, whether that’s housing, consumer spending, business investment, industrial production or whatever, only to fallback later in the year because of external or internal issues.

Last year the political uncertainty surrounding the election and the Fiscal Cliff slowed the economy down in the second half, the year before — and the year before that — Europe was the focus of economic fears along with the continuing housing crisis. This year, we’re into Sequestration and the debt ceiling battle is coming up.

Risks from Europe seem to be on the back burner and less fraught than they used to be, but the fact is that nothing fundamental has changed about the European situation except that the European Central Bank is printing a lot of money. Austerity is taking a huge tool, unemployment is sky high and EU leaders are no closer to solving the region’s problems than they were a few years ago.

Anyone of these risks, or a combination of them or other risks that we are unaware of at this time could push the economy into recession. There are a number of positive developments that could continue to keep the economy on a growth track, including the recovering housing market and the brightened employment picture — I’m hopeful because I want a growing economy and it’s benefits just as much as the next person.

Re big picture risk, whether the risks of a recession are low or high, I do believe that we eventually will experience another financial crisis. I actually had an argument on Twitter the other day based on expressing the opinion that another global financial crisis is all but inevitable.

I base that belief on the fact that the fundamental problems in the global economy that lead to the Great Recession haven’t been solved in any meaningful way and that the systems that we have are so complex and interact in so many unforeseen ways that it is a matter of when, not if, another crisis occurs. It could be next month, next year or in five years. I have no idea.

But if you look at economic cycles and the recent history of boom and busts, it is evident that these crises occur periodically and that they are happening more frequently. I would love to be wrong, because the havoc they create causes so much suffering. We’ll just have to wait and see.