Monday 27 March 2023

Why global financial turmoil continues and how it could affect you

https://www.cbc.ca/news/business/financial-contagion-column-don-pittis-1.6789783 

 

Why global financial turmoil continues and how it could affect you

In a deeply connected global financial system, contagion may be inevitable

Regulators and public officials are anxious to be reassuring, but for Canadians trying to understand how a series of ostensibly unconnected global bank failures could affect them, being like the meme dog in the burning kitchen that turned 10 this year may not be the best plan either.

After market turbulence last week, worries continued over the weekend. New reports on Sunday said money market funds had swollen by $286 billion US in two weeks as people withdrew deposits from banks. Also on Sunday, International Monetary Fund managing director Kristalina Georgieva warned a Beijing audience of the growing risk of global financial instability.

As shares in Frankfurt-based global investment banking giant Deutsche Bank fell 14 per cent in early trading on Friday and U.S. Treasury Secretary Janet Yellen held an unscheduled in-camera emergency meeting of the Financial Stability Oversight Council, it was pretty clear that what seemed like an isolated failure of one overextended California bank is still sending out ripples around the world.

Last week, Yellen told depositors that U.S. banks were safe and sound. While calming words are nice, emergency meetings are not entirely reassuring.

The phenomenon of financial contagion is not new and has been widely studied.

"Financial contagion describes the cascading effects that an initially idiosyncratic shock to a small part of a financial system can have on the entire system" sounds like a discussion of the collapse of Silicon Valley Bank (SVB) about two weeks ago and the events that followed, but the quote actually comes from the 2013 Handbook of Safeguarding Global Financial Stability.

And while experts know that such a cascading series of events can sometimes be hard to stop, financial experts who are themselves deeply embedded in the same financial system are, quite reasonably, anxious to explain that the problem is limited to unique causes that can be fixed.

A worker walks past Deutsche Bank offices in London,, March 16, 2023. REUTERS/Toby Melville A man walks past the Deutsche Bank offices in London, England, earlier this month. It was hoped that disruption in the banking sector had been nipped in the bud, but shares in the German titan plunged 14 per cent at one point on Friday morning. (Toby Melville/Reuters)

Likelihood of crisis 'quite limited'

"So far, the problems have been concentrated in U.S. regional banks and one specific weaker entity in Europe," said a report issued early Friday from the Netherlands-based ING, whose shares also fell sharply on the day. "The European issue has been more or less addressed by prompt interventions by the Swiss government and central bank.

"This makes a likelihood of a wide systemic crisis quite limited," said the report, titled Market Turmoil: Making Sure You Don't Make a Drama Out of a Crisis ... Yet.

The question that is so difficult to answer in the heat of the moment is what is causing the contagion and the correct analogy to choose. Is it just a "weaker entity" or two that will soon stabilize. Or is it like an accumulation of snow at the top of a financial mountain built up over a period of low interest rates and loose lending?

A woman with white hair and wearing a black suit with a scarf gestures. U.S. Treasury Secretary Janet Yellen — shown testifying before the Senate finance committee in Washington on March 16 — has provided reassurance that the U.S. banking system is sound, but she also called an emergency meeting on Friday. (Mary F. Calvert/Reuters)

According to Jacqueline Best — a University of Ottawa political studies professor who has examined previous periods of inflation and market instability, and who is currently doing research as the Visiting Hallsworth professor at the University of Manchester in England — the fact that the correct analogy is unknown as a crisis begins perpetuates contagion.

As someone who studies financial crises, she says her feelings are torn.

"These are fascinating times, intellectually, for me, but deeply worrying personally," said Best, speaking on the phone from England as European markets were closing on Friday.

In a theoretical sense, she said, contagious market rises and falls are a combination of psychological and real factors, tied to the concept of "animal spirits" proposed by John Maynard Keynes during the Great Depression after the market crash of 1929, as periods of enthusiasm are replaced by fear.

Searching for buried bodies?

In the current case, the flaws found at SVB and Credit Suisse mean everyone is looking for similar flaws elsewhere.

It is a well-known concept that rising markets can cover up a lot of unrecognized creative accounting, risk-taking and outright fraud that are only revealed once falling markets require that someone be paid.

That's the concept that the falling tide shows who has been swimming naked. But Best has a more macabre analogy.

Men look at their computers surrounded by monitors at a stock exchange Traders work on the floor of the New York Stock Exchange in Manhattan on Thursday. It's a well-known concept that rising markets can cover up unrecognized creative accounting, risk-taking and outright fraud that are only revealed once falling markets require that someone be paid. (Brendan McDermid/Reuters)

"If we don't know enough about where the bodies are buried, that's where you can get crises jumping from sector to sector, institution to institution, from country to country," she said.

"The self-fulfilling dynamic of markets can be quite rational," Best said. "Once you see that others are selling or withdrawing their deposits in large number, it is rational to do the same thing as quickly as you can."

The other real kind of contagion is the unforeseen impact when solving one problem leads to another. Last week, U.S. Federal Reserve chair Jerome Powell warned of the effect of "tighter credit conditions," which at its extreme is called a credit crunch where no one is willing to lend.

Falling dominoes

Another unexpected impact has been caused by a financial tool intended to prevent bank failures.

Few Canadians even knew that AT1s existed before last week. Now the special bonds intended to help banks in distress are leading to a cascade effect of their own after the shutdown of Credit Suisse turned $17 billion US of AT1s into worthless paper.

It is hard to imagine in advance the chain of events that will lead the next domino to fall. It may be even harder for Canadians to think about how a global crisis could affect them.

Canadians like to complain about their banks, but Best points out that Canada's small number of large and well-regulated banks have been a bulwark against previous crises, including in 2008.

"We did better than many, many other major economies," she said. "But that said, it was also pretty miserable."

We are part of a global system, and if global finance gets bad enough, we may discover there are bodies buried in Canadian institutions if the economy faces a deeper recession, which can affect politics, businesses, budgets, jobs and real estate.

"That's where I get particularly concerned because of the Canadian vulnerabilities right now with huge indebtedness and so on. It's pretty clear that certainly in a more significant recession, we could potentially have a worse time of it this time around," Best said.

It is not just ING telling us in its report that a wide systemic crisis is unlikely. But rather than saying, "This is fine," being just a little bit frightened and a little bit careful may be a good strategy for the country and for individual Canadians.

ABOUT THE AUTHOR


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.

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608 Comments  
 
 
 
John Bouy 
paper has always been worthless but a good fiat currency confidence scheme and wage slavery paradigm gives it 'value' 
 
 
Charles Wilson
Reply to John Bouy 
What's the worth of gold? It is just a hunk of metal that is pretty and malleable. You can't eat it, drink it or build with it. People put value on it - just like people put value on paper money. 
 
 
Robert Lucca 
Reply to John Bouy 
People love cash. I love cash. You know how I know that, because when i pay someone with cash I always get a discount. I pay less , they get cash, everyone is happy. 
 
 
Tom Graham
Reply to Robert Lucca    
not only the that, the gov't hates it because they can't track you or tax you in the booming underground economy. 
 
 
David Amos 
Reply to Robert Lucca   
Cash is King
 
 
John Bouy
Reply to Charles Wilson
not the same







James Minion 
No point trying to blame existing and upcoming Canadian financial turmoil on any global financial turmoil that exists

- Canadian household debt to income is 4th highest In the world have Finland, New Zealand and Netherlands that are all in huge housing bubbles

- corporate debt levels in Canada are at record high and per capita is one of the worst is western world

- Canada is house rich and cash poor. Only so king oriole can rely on their heloc(home equity line of credit) to make their mortgage payments and go on vacations before banks tighten credit and force variable rate mortgage holders to refinance

Certainly a rosy economic picture here and the above are just a few main points of dozens of dozens that exist

 
 
 
Wayne House
Reply to James Minion 
Eat, drink, and be merry...for tomorrow we die. 
 
 
David Amos
Reply to James Minion
Methinks its wise to never believe anything until it is officially denied N'esy Pas? 
 
 
Jan Lenova 
Reply to James Minion
the Canadian gov't(s) used to mostly defend the working middle class, but now they only defend the corp, rich, elite, ..., with tax breaks, and look the other way regarding offshore naughties. 
 
 
Phil Anderson 
Reply to James Minion
The ratio of Canadian household debt-to-income has also widen to 181.7 %. The Fraser Institute reports that from 2019 to 2021, Canada had the second-highest increase in its gross debt-to-GDP ratio out of 33 countries covered by the IMF, behind only Japan. Our gross debt-to-GDP ratio ( Federal & provinces) increased from 87.2% (2019) to 112.1% (2021), an increase of 24.9 percentage points. Canada’s federal debt reached $1.2 trillion following several massive budgets. Canadians are paying over $31 billion in surcharges and interest payments on federal debt, a new report by the Parliamentary Budget Office (PBO) shows. The PBO’s Economic and Fiscal Outlook for October found that the cost of debt servicing is expected to balloon to $47.6 billion as a result of “higher interest rates and the additional accumulation of “federal debt. A 1% increase in interest rate will increase an additional $23 billion in interest payment for public debt. 
 
 
Wendall Halls
Reply to Jan Lenova 
"the Canadian gov't(s) used to mostly defend the working middle class"

That never existed

 
George Jetson 
When Nixon took the USA off the gold standard in 1971 Chairman Mao supposedly noted that "We know know how the USA will end". 
 
 
George Jetson 
Reply to George Jetson 
oops " W now Know how the USA will end". 

 
Mike More
Reply to George Jetson 
Mao rand China into the ground, literally killing tens of millions of people. Not really a credible source for economic advice. 
 
 
Noreen Juneau
George W?
 
 
David Amos

Reply to Noreen Juneau
Every bit the crook Nixon was


David Amos 
Reply to George Jetson 
The key word is "supposedly" Correct? 
 
 
 
 
 
Inger Nielsen
let the dominos fall. it will help reset the economy  
 
 
David Amos 
Reply to Inger Nielsen
True but not in a positive fashion  
 
 
 
 
 
 
Anthony Loopinski  
Governments have no clue what the problem is, as they continue to pour more money onto the problem.... Amazing.
 
 
David Amos 
Reply to Anthony Loopinski 
They know they are the problem and they ain't telling for rather obvious reasons  
 
 
 
 
 
 
Ron Haverkamp 
Amazing how folks who have said this for some time now, who were shunned and told they were crazy, are now being proven correct, with the tabloid even printing a popular cartoon that began in that community... 
 
 
David Amos 
Reply to Ron Haverkamp
I resemble that remark 
 
 
 
 
 
 
 
 
 
 

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