https://www.theguardian.com/business/2016/jan/12/beware-great-2016-financial-crisis-warns-city-pessimist
This article above explains the scare of a 2016 financial crisis, and that it can be just as bad as the financial crisis of 2008. There recently has been deflation in emerging market economies that central banks are not aware of since the beginning of the year. The article makes a point to say that with the recent conflict in markets share prices have fallen, “along with the decrease in cost for oil which has left Brent Crude Oil trading at barely thirty dollars per barrel.” Credit expansion has also given a false representation of where the U.S. economy is due to how successful the central banks are doing. The banks are “borrowing to finance share buybacks.” The article says that bankers haven’t learned their lesson from the 2008 financial crisis, it is mostly because they didn’t understand the system, and they don’t understand it now.
This relates to the video we watched in class on the 2008 financial crisis. The problem comes back to that there is not enough capital being put aside for loans given out. As we had learned from class, credit default swaps don’t work, and don’t reduce trade loan risks. Making more credit swaps might make the market grow for the time being, but will eventually come around to bite you as it did in 2008. With deflation being a problem now, banks need to see that a crisis can be upon us again. Bankers weren’t aware that a crisis could have been as bad as the 2008 financial crisis until it happened. They need to stop avoiding that it could be a possible threat again, and to examine the decisions being made. Thinking that oil prices would never fail is an assumption or gamble that central banks have made that shouldn’t have been made. This was the same reason for the collapse of 2008 because central bankers thought that real estate prices would never raise and always stay at a low rate. I imagine also that derivatives will play a role in a collapse of many other industries because of the amount of investments in oil. Central bankers have to get a better understanding of how the system works in order to prevent these issues, and have to stress the importance of education on the economy before being allowed to carry out their job.
Stephen,
ReplyDeleteThis far (only 9 months in of course) this has yet to happen this year. Why do you think this is and do you think it will happen in the future?
I think the financial crisis hasn't happened yet because there has been too much focus just on the decline of oil prices in 2016. In fact there has been many other factors that can stabilize this decline such as the dollar still holding its value. Another example is Amazon and organic food increasing revenue at a rapid pace. Medicine, policing and war also continue expanding. I also think economists and bankers have alerted early that there could be a financial crisis in the near future in order to retain control on certain issues early before there actually could be a crisis. I do think the decrease in oil prices could carry the consumer economy for years to come but there are still many problems at stake such as high public debt and taxes, the outsourcing of jobs, rapid trading, credit default swaps, derivatives and high unemployment. This could cause a financial crisis in years to come.
Deletehttp://www.activistpost.com/2016/01/will-the-us-economy-collapse-in-2016-predictions-and-preparations.html
You definitely have a really good point about credit default swaps and risk aversion. As the video mentioned and as you were inferring, risk has yet to be minimized; it's more or less just been disbursed across the board in an unorganized and unsustainable fashion. Moreover, banking on the price of oil is itself an incredibly risky endeavor that is hard to predict (e.g. Venezuela).
ReplyDeleteVery interesting article. Bankers continue to use similar methods to the 2008 financial crisis. Why do you think bankers don't understand the risks system? Is it really this or do they just not care because of the potential payoff?
ReplyDeleteVery interesting article. Bankers continue to use similar methods to the 2008 financial crisis. Why do you think bankers don't understand the risks system? Is it really this or do they just not care because of the potential payoff?
ReplyDeleteYou do bring up a very good point. I think bankers try to get as close as they can with risk taking too much of a gamble. Greed does play a part in this because they want to make the most money they can. I also think they don't truly understand the system. These bankers may be playing with fire, but I don't think they understand how the decision they make can come back around to them in years to come. As we talked about in class risk never disappears. There has to be a balance of how much greed these bankers have (which makes them sufficient at their job) along with realizing the consequences their decisions have on the economy and the everyday person in the U.S.
DeleteI think that the article makes a few good points, but I do have a few questions. Do bankers have anything to do with the price of Oil? While I feel as if oil price can certainly lead to an economic collapse, I believe that this is something that is out of the control of bankers.
ReplyDelete