The following is an interview with Yena Yoon – a financial journalist with Chosen Ilbo “the largest newspaper in South Korea” conducted on 12 February, 2018, but still relevant.
What is the most remarkable change in financial market after 2008 global crisis do you see? Why do you think so?
The most striking outcome from the global financial crisis of 2007-9 was that there was no structural change to the international financial architecture/system – the system that was at the heart of the global crisis. Instead policy-makers imposed on to the existing financial system – of financial deregulation and capital mobility – two policies: monetary easing and fiscal consolidation. This ‘economic model’ of monetary radicalism and fiscal conservatism has slowed global economic recovery in a way that is historically unprecedented. At the same time it has massively expanded Central Bank balance sheets to provide ‘life support’ to the ‘near-death’ finance sector. Because the finance sector (or the 1%) have been the main beneficiaries of central bank largesse, this has intensified inequality. Last year, at a time when the global economy (‘the semi-comatose patient’) was supposedly in recovery, boosted by growth in the EU, central banks still felt it necessary to inject at least $3 trillion of liquidity into the financial system. The global recovery continues on Central Bank ‘life support’; remains fragile, and is prone to volatility and shocks.
2. Could you pick 3~5 risk elements of our financial market these days? Why do you think so?
The first risk faced by financial markets is synchronised central bank monetary tightening. Interest rate rises are a threat to a heavily indebted and still weak, global economy – and to the many corporates that have loaded up on debt over this last decade. This risk has risen with the Trump administration’s appointments of inflation ‘hawks’ to key posts at the Federal Reserve, and to the retirement of ECB President, Mario Draghi, in 2019
The second risk is related: the fall in savings, and the build-up of consumer and corporate debts in both the US and China. Defaults on these debts could lead to financial sector failures, and in a highly integrated, synchronised globalised economy, one bank failure could send shock waves across borders.
The third risk is political: across the world, populations have risen up in anger at governments that allowed self-regulating ‘free’ markets to determine the allocation of resources across societies and across borders. Many are calling for a ‘strong man” (or woman) to protect them from uncontrolled market forces. Hence the election of, for example, Presidents Trump and Duterte (to name but two) who have promised to “build a wall” to protect society from the ‘free market’ – whether that be the trade in goods and services, or in drugs, or in the free movement of people and capital across borders. These nationalist, protectionist reactions will interfere with the workings of markets, and threaten volatility, instability and even war.
3. Do you agree with ‘10 years Crisis cycle’ hypothesis? Why do you think so, and when do you think the next crisis will come?
I do not agree that there is a cycle that is in a sense, inevitable. On the contrary: economic policy is man-made (sic) and can be unmade and transformed. The economic model of monetary easing and fiscal tightening was and is, disastrous. A more enlightened, geniuinely Keynesian model would have re-regulated the finance sector; managed capital mobility, credit creation and the rate of interest for loans across the spectrum of lending (short and long, safe, risky and real.) These monetary policies if combined with fiscal expansion at the time of the 2007-9 crisis, would have raised investment – both public and private. They would have led to the creation of jobs, raised incomes, lowered debts and minimised inequality.
Instead the economic model adopted after the crisis led to higher levels of debt globally; to falls in good, secure employment and income; and has intensified inequality.
History will not treat policy-makers of this era kindly.