Have financial regulators and politicians done enough?


BALI is one of the world’s most beautiful conference locations. However, the movers and shakers of international finance who traveled there this week for the annual meeting of the International Monetary Fund and World Bank may not have been in the mood to appreciate the exotic scenery.

In its latest Financial Stability Report, the IMF has warned of “dangerous undercurrents”. These stem variously from the rising trade war, potential defaults on ballooning debts in emerging markets, not least Turkey, and still booming asset prices at bourses around the world.

Within 48 hours of the report, market boards in Asia began to show red, leading European exchanges sharply into negative territory. All this, despite the fact that the US economy is recording some of its most positive figures for years, though certainly not “the best ever” as President Trump claimed.

Analysts who predict market corrections, even sharp falls in the value of assets around the world, are always correct, because the prices of assets always retreat at some point. But what few of the economists and market watchers ever get right, is precisely when this radical change in values is going to take place. And those few who do call the downturn, and as a result move out of assets into cash before the markets tank, are generally more fortunate than prescient in their timing.

The overweening conceit that proceeded the 2008 international financial collapse was that thanks to the globalization and multilateralism of markets and politics, the peaks and troughs of asset prices had been largely ironed out and values could continue to appreciate. Too many little people around the globe are still paying the heavy price for this arrogant lunacy, unlike those same wealth managers and investment bankers who embraced it so enthusiastically.

When it comes to economic forecasting, the IMF is no wiser than anyone else. In 2016 it predicted the UK economy would immediately collapse if voters chose to leave the EU. In the event, since Brexit, the British have actually seen a marginally stronger economic performance than their soon-to-be former partners in Europe. The IMF has also made egregious errors in the way it has inflicted austerity policies on financially struggling states, most particularly in Africa. Its cures have often been every bit as damaging, if not more harmful, than the conditions they were designed to fix.

But the IMF is clearly right about one thing. The international banking system may be better prepared for a dramatic economic downturn but national regulators still have not armed themselves sufficiently to ward off the same sort of malpractice that saw the 2008 meltdown and indeed the 1928 global financial collapse which it mirrored so closely. The IMF has correctly pointed out that the Trump administration has done away with important prudential regulatory checks which would have kept US banks from re-embarking on the catastrophic financial maneuvers that forced governments into multi-trillion dollar bailouts. These have hobbled economic growth for the last decade. When bankers met at the IMF’s 2008 meeting in Washington, the markets were already two weeks into their biggest collapse in 80 years. The sense of panic was palpable. But as politicians cast around desperately for ways to stop the rot, they also vowed that they would never again allow a disaster of this scale. Tens years on, have they really done enough?