We might well be approaching a financial and economic crisis comparable to the Great Financial Crisis of 2007. Thus it is important to develop an alternative to saving the old, destructive neo-liberal system as happened then. We will be concentrating on this in the next days and weeks. We won’t be fooled again.
Juan Laborda teaches Financial Economics at the University of Carlos III and Money and Banking, Syracuse University (Madrid)
Originally published in Spanish at vozpopuli
Translated and edited by BRAVE NEW EUROPE
If risk aversion in the financial markets continues, the umpteenth bubble will burst and we could see major financial crashes
The coronavirus has emerged as a black swan that could disrupt the course of global economic growth. With the data available today, the health risks would be limited, even if it were to become a global pandemic. Conversely, the negative economic consequences could be considerable if fear becomes the dominant human response, especially in the context of the enormous implicit vulnerability of the global economy.
Western economies only know how to survive from bubble to bubble, an aspect that was accentuated in the exit to the Great Recession, where what was economically and socially efficient was not done. All to protect the interests of a certain class, the superclass. And we were there when the virus finally ended up generating the stock market crashes of the last two weeks, those that have made the crybabies on Wall Street and the boards of directors of the global systemic banks nervous, those who, with impunity, under the acquiescence of the governments in power, continue to play the casino, together with the richest individuals on the planet, via shadow banking. If risk aversion in the financial markets continues, the umpteenth bubble generated will be burst, in this case US corporate debt, and we could see major corporate bankruptcies.
The reaction of the financial markets
Over the past two weeks there have been sharp declines in the prices of risky assets, except for gold and silver: stock market shares, high yield corporate debt, peripheral sovereign debt, commodities, carry trades… The previous week was the worst week for stocks since 2008, with the world’s major stock markets falling by more than 10%. But the US stock markets, ended on Friday surprisingly being “tapped”. Shortly before closing, on a Friday afternoon, after a horrendous week, when all the sellers had finished selling and were exhausted somewhere in hiding, licking their wounds, when there was no liquidity left in the market, then stock prices bounced sharply upwards. This happened during the last 15 minutes of trading, when the sellers had disappeared, and it took only a little bit of buying pressure to get the prices back up. At a glance, the S&P 500 Index shot up 73 points in 15 minutes, from 2,881 to 2,954, falling “only” 0.8% on the day. The same happened with the Dow and the Nasdaq.
Weeping economists and Wall Street spokespersons were complaining for days that the Federal Reserve “rescued” their shares with promises of further interest rate cuts, even before the March meeting, as finally happened this Wednesday when they made an extraordinary 0.5% cut in the official interest rate. They have become somewhat accustomed to the drugs supplied by the central banks, and without them, they are vulnerable to any relapse. This is the great drama of the global economy because the money is not used in favor of productive activity and the citizenry, a proposal of guaranteed work, following the Modern Monetary Theory, but rather it is a tribute to that super-class rentier who earns money without end while doing nothing productive.
They are the new feudal lords, individuals who are insensitive to the needs of the vast majority of citizens. From Wall Street they began to harass the Federal Reserve to make sure that the market is not allowed to do its thing, because a market that really works, and in which prices are allowed to collapse, would be too much to ask for all these investors, economists and stockbrokers hooked on the drug of cheap money. Instead of a market, they want the well-oiled money machine of recent years. And in the end, of course they got it, temporarily.
The probability of an interest rate cut at the Federal Reserve’s March meeting jumped from 8.9% a week ago to 93.6% at the end of Friday. Trump organised his praetorian guard against the Coronavirus around Mike Pence. The goal, to save the narrative, and manage it, is the beginning of every dystopian administration. His Secretary of the Treasury, Steven Mnuchin, and the White House chief economist, Larry Kudlow, met with the main American banks, hard hit not only by the falls in stock prices, but also by their over-sized short positions in gold and silver, where, faced with the strong rise in their prices, they used evasive action cap losses. The Comex’s clearing house demanded new higher requirements on maintenance margins.
This is how the umpteenth bubble burst
In September last year, at the height of the global economic slowdown, we warned that for a recession to occur there would have to be a significant increase in risk aversion in the financial markets, which would again burst the umpteenth bubble engendered by policy makers. This is the evolution of the planetary economic cycle since 1998, where one of the characteristic features of the neoliberal governance system, the financialisation of the economy as a whole, has definitely been unravelled without complications. A collateral result, the new devourers of the public budget. We refer to systemic banking, under the moral risk “too big to fail”.
The bubble that would now burst would be that of the US corporate private debt. We warned that a private debt crisis could be coming, which could also activate a sovereign debt crisis in those countries that lack monetary sovereignty, like ours. Non-financial companies from half the world entered a new quagmire, a river of debt of their own creation. They have been driving up their share prices with corporate acquisitions and/or endless buybacks of their own shares, both financed with low interest rate loans and junk bond issues.
Along with zombie banks, we would now also have zombie corporations. In a global environment of low interest rates, the search for profitability found a new and comparatively attractive source, emerging US corporate debt, which was subsequently transferred to other geographical areas, in the form of CLO (Collateralized Loan Obligation) securities. This whole house of cards may eventually collapse. And the coronavirus could set it off. Oh, I forgot! Meanwhile, systemic banking continues to rock the cradle through shadow banking. All very liberal.