Is the Financial System Now More Unstable Than in 2007?

We “solved” a debt-crisis by taking on additional debt. Why, with economic brilliance like that, what could possibly go wrong?!? I mean, when we don’t make enough to cover the mortgage and credit card payments don’t all of us rush out and add three more loans to the mix?

If you don’t understand the wisdom in that, you must not be a high-powered, overpaid banker or economist!!

There’s also this little problem of financial derivatives—some estimates put the notional amount at $1.4-quadrillion (a quadrillion is 1000 x one trillion, which is 1000 x one billion, which is 1000 x one million–that’s right, you can’t begin to fathom numbers that big!) and many of these bets in the market are tied to interest rates—keep that in mind as you read this link.

From Ambrose Evans-Pritchard of the Telegraph:

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.

Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.

“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph.

Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then.

Credit spreads have fallen to to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. The BIS said 40pc of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors.

When the financial world blows up, also remember that virtually every nation in the west has now rewritten its laws to say that depositors will have their accounts plundered to cover the banker’s bad bets. Even if they start the thefts with large accounts—as they did in the Cyprus crash—if you work for a company it’s very likely their payroll account is “large” and the next payday could present a nasty surprise.

Seatbelts and helmets on… it’s gonna be a wild ride one day.