Financial crises anything but predictable

Editorial | Mary Ma 13 Sep 2018

American bank Lehman Brothers collapsed 10 years ago this week.

A lot has since been said by regulators to play down the risk of a financial crisis in the wake of rigorous measures taken to keep markets safe.

Ceajer Chan Ka-keung, former secretary for financial services and the treasury, was quoted as saying the chances for an incident to worsen into a full-blown crisis is lower than ever.

He's certainly right, but the chances are always relative.

Compared to 2008, we're safer nowadays as banks are better cushioned against turbulence after substantially increasing their equity capital as required by authorities.

Regulations governing risky derivatives have also been improved here and elsewhere.

But weren't officials equally confident about their financial systems during those long months before Lehman sought bankruptcy protection in 2008. And those came after so much had been done by governments to protect their financial infrastructure in the wake of the 1997 Asian financial crisis.

I remember that in 2007, Ben Bernanke, then chairman of the US Federal Reserve, simply shrugged off warnings that a slowdown in the US housing market could have profound implications. He said it would at most be a local issue.

However, what happened afterward proved Bernanke's optimism was misplaced.

During the subsequent months, the subprime mortgage market melted and Lehman went bust, wreaking havoc across the world like a tsunami.

In Hong Kong, the tidal waves lapped onto our shores in the form of the minibond crisis - the busting of risky derivatives and corporate debts packaged and sold as low-risk financial products at local banks. It was a valuable lesson learned the harsh way.

There are numerous other examples to refer back to over the years, but I'll desist.

Financial order may have improved from a decade ago, but the core problem has never changed throughout history - when a problem is solved, another is created simultaneously in a different form.

China, for example, sailed through the financial tsunamis by massive spending financed by central reserves and local borrowings, with the adverse effects of the latter still felt today as Beijing struggles to unwind to pave the way for a soft landing.

And don't forget the Fed's series of quantitative easing that led to excessive capital flowing into emerging markets, pushing up commodity and asset prices. Hong Kong is still suffering as the world's most expensive city to live in.

As the Fed continues to unwind quantitative easing and raise interest rates, funds are bound to keep flowing out of the emerging markets towards the United States.

Thus, currency crises brew in Turkey and Argentina. Will they spread to other economies?

Certainly, the Sino-US trade war must be mentioned. Some economists are predicting that as for America, the crunch will surface around the end of 2019, when the bite of interest rate hikes will become evident as the effect of tax cuts disappears.

These can be predictable incidents. But the true black swan can't be predicted, and confidence that there won't be a new crisis can only be ill-founded.

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