Global debt levels are above those from before the crisis in 2008 and unregulated parts of the financial system could trigger a global panic, according to the International Monetary Fund (IMF)

 The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reformsneeded to protect the system from reckless behaviour, the International Monetary Fund has warned.

The upswing in global economy have had investors cheering for more – but with great times comes great risk. These times with low interest rates and subdued volatility have caused a dramatic rise in lending and with global growth of banks like JP Morgan and the Commercial bank of China, beyond what we saw in 2008 – IMF has these banks, that are most likely “too big to fail”, on their radar.

It’s been 10 years since Lehman Brothers collapsed, setting off a global financial meltdownthat would take years to correct. A decade later, there are some guardrails in place to prevent a Great Recession 2.0 — but another crisis at some point is essentially inevitable.

Bill Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis says that he do not think we are facing an immediate crisis anytime soon. The underlying conditions in the economy and the financial markets are very different than they were 10 years ago. Back then we saw an explosion of mortgages collateralized by houses, creating a debt-financed housing bubble. Furthermore, the market for debt securitized mortgages collapsed – this was two bubbles that burst at once.
The warning from the IMF Global Financial Stability report echoes similar concerns that complacency among regulators and a backlash against international agreements, especially from Donald Trump’s US administration, has undermined efforts to prepare for another downturn.

The stability report said the development of digital trading platforms and digital currencies such as bitcoin, along with other financial technology companies, had been rapid. It said: “Despite its potential benefits, our knowledge of its potential risks and how they might play out is still developing. Increased cybersecurity risks pose challenges for financial institutions, financial infrastructure, and supervisors. These developments should act as a reminder that the financial system is permanently evolving, and regulators and supervisors must remain vigilant to this evolution and ready to act if needed.”

Like many institutions the IMF has warned that rising levels of inequality have a negative impact on investment and productivity as wealthier groups hoard funds rather than re-invest them in productive parts of the economy. Without a rise in investments, economies remain vulnerable to financial stress.

Comments