So you thought the great financial crisis was done and dusted? Then think again.
No less a figure than Raghuram Rajan, former chief economist of the IMF and currently governor of India’s central bank, is warning that the world faces another crash at a time when the global economy is less capable of absorbing the impact.
Rajan is concerned about the bubble in asset prices, ranging from shares to bonds and property, that has taken place since the 2007-09 crisis as investors seek greater interest rate returns.
Crisis: The build-up of financial imbalances has been fuelled by the money printing machines at the Federal Reserve, the Bank of England and the Bank of Japan
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Crisis: The build-up of financial imbalances has been fuelled by the money printing machines at the Federal Reserve, the Bank of England and the Bank of Japan
The build-up of financial imbalances has been fuelled by the money printing machines at the Federal Reserve, the Bank of England and the Bank of Japan.
It could lead to ‘sudden price reversals and sharp spikes in volatility’, Rajan says in the Central Banking Journal.
He argues that the most obvious trigger for a price shock would be a further surge in asset prices in the belief that, should they collapse, the central banks will step in to protect investors.
Reality is that the support provided by central banks to markets is being reduced, with the US cutting back on its bond buying and the Bank of England bracing the country for an interest rate rise from the current highly subsidised 0.5 per cent.
The Indian central banker also expresses concern that the exchange rate for the euro against the other major currencies is far too high, given the current state of euroland, with Italy, the third biggest, still in slump.
Portugal is struggling with fractures in the banking system that have spread to France.
In light of the risks Rajan calls for much more policy co-ordination among the most important economies and in particular for urgent work on the effects of spill-overs from the present loose monetary policies being pursued by central banks.
He notes that his former employer the IMF recently has begun work in this area and suggests that central banks join the debate.
Rajan was one of the siren voices ahead of the last crash and his book Fault Lines cleaned up on economic book prizes. His call to arms should not be ignored.
