A near debt experience: New crisis approaching?

Five years after Lehman, the crisis may be back, bigger and brasher than ever before. “Taper Terror” may be only the beginning...

Central bankers are widely held to be boring. True, central bank bosses can attract vast media speculation and, as Larry Summers just learnt, it’s a harrowing process trying to gain approval. New Central Bankers can be treated like financial rock stars, as newly-appointed Governors in Britain and India have just discovered. Well, at least for the first week...

Nevertheless, central bankers are broadly perceived as rather dull, plodding individuals and their excitement at the minutiae of Repo transactions can cure insomnia in many for whom sleep is a difficult state to achieve. The Bank for International Settlements, “the central bankers’ bank” is situated in Basel, a lovely Swiss city but nonetheless not regarded as a hotspot of excitement even amongst the Helvetic Cantons [Switzerland].

However, when somebody at the BIS breaks their silence and leads what amounts to the banking equivalent of the monastic life, then the world ought to be listening. This week William White the BIS Chief Economist has made a chilling pronouncement to freeze the autumnal Swiss air: “This looks to me like 2007 all over again, but even worse.”

Given his office, such a brutal prognostication would be worrying enough. However, bear in mind Mr White’s pedigree - he foresaw the last financial crisis (and was widely ignored at the time). Should we be terrified?

This time around the world is sitting on a veritable mountain rage of debt throughout the world. Low interest rates and ‘funny money’ policies have fueled the mother of all multi-asset bubbles and some frankly reckless lending at remarkably low interest rates with little security. Total public and private debt is 30% above the heady pre-crisis levels in the advanced economies, while the world’s emerging markets, as shown by corporates in the likes of Brazil and China, among others have gorged on debt.

Now the world teeters on a horrible precipice. “Taper terror” has already struck as worries grow about when the Fed will tighten their interest rate policy. One really worrying issue perhaps driving  an element of such volatility is that a whole generation of US interest rate traders have grown up thinking it normal to have rates semi-permanently as close to zero as makes no difference.

A vast swathe of the western money market now has little or no experience in trading when interest rates are increasing. 

Meanwhile, spendthrift western governments providing more services than they can provide and then dumbly bailing out the banks and pumping trillions of stimulus into the system, have simply run out of firepower to deal with another crisis. In fact they could be in the first line of defaulters (and no it doesn’t help the outlook for the Euro no matter which discredited Eurocrat claims that crisis is over).

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.