Experts from the UK government and the City have warned that another financial crisis will happen and is just a question of when and how bad it will be.
Since the ten-year anniversary of the Lehman Brothers collapse on 15 September, 2008, financial experts have been speaking about how the next crisis will take shape and when.
Former UK chancellor of the exchequer Ken Clarke, member of the Monetary Policy Committee of the Bank of England Dame DeAnne Julius and ex-Barclays CEO Antony Jenkins now founder discussed the possibility of another crash on BBC Radio 4’s “Decision Time”.
What is the risk of another financial crisis?
All five experts interviewed on the programme agreed that another financial crisis is inevitable.
The global and cyclical nature of the financial world, the nature of human beings and the current poor state of world politics and economics were cited as reasons.
The China-US trade war intensifying, the collapse of an Italian bank and a major cyber-attack were possible scenarios the group talked about that could hypothetically lead to the next crisis.
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“A question of when and how bad”
Ex-Barclays CEO Antony Jenkins said: “The risk [of a crash] is high, it’s only a question of when and how bad. There’s two reasons for that, firstly because we haven’t changed as human beings and how human beings tend to get over-optimistic over time. Secondly, we still haven’t really fixed the problem of aligning risk and reward.
“Whether the banks get bailed out by the equity holders, the bond holders or by the taxpayer – at the end of the day it’s still the citizen who pays the price, because we all own shares in banks indirectly through mutual funds and insurance policies, we own debt in banks. When you miss-align the interests of the people running those organisations with the people who own them directly or indirectly and you combine that with human beings’ over-optimism, it’s inevitable, the only question is when and where.”
Former head of macroeconomic analysis at HM Treasury Angus Armstrong said: “The UK is the centre of a big global financial system so shocks that happen anywhere in the world can have ramifications for the UK.
“But remember the government has put through legislation to create a ring fence between the so-called traditional banking, the deposits you and I use every day and the riskier part of banking. The idea is that we’ve made a separation from the regulated part that we use every day and the part that might contain some of those risks. So from the Treasury’s perspective we’d hope that this has been at least addressed.”
Ken Clarke MP said: “I think they’ve done a lot to reduce the risk of the last financial crisis happening again exactly as it did then. There will be another financial crisis, sooner or later, no one’s yet learnt how to manage perfectly a modern globalised economy. It will be different from the last one, when it happens it will take you by surprise and it’s just a question of how well you handle it and minimise the impact on your economy.
“I do think the risks are quite high at the moment: Trump’s trade wars, Chinese debted problems, hard Brexit, and things are slightly going wrong. We’ve got cheap money with low interest rates, governments are behaving irresponsibly and more irresponsible governments are being elected, so the risks are quite high, I would be cautious.”
Will the next crash be as severe as 2008?
Antony Jenkins said he was expecting a financial crisis in his lifetime and one approaching the severity of 2008.
DeAnne Julius gave two reasons for saying the next crash would not be as severe as 2008, and that a 30-year cycle was more likely.
She said banks, governments and institutions can now expect some of the early warning signs of a crisis, having lived through 2008.
Bank of England stress tests looked at a replication of the situation as it was then and, for example, considered house prices falling by 33%, and she said all the major banks passed those tests.
So, Julius said, we are better provisioned in a regulatory sense at least.