Monday, June 17, 2024
Home Business Why global financial turmoil continues and how it could affect you

Why global financial turmoil continues and how it could affect you

by Admin
0 comment

Is it possible to talk about economic contagion without perpetuating it?

Regulators and public officials want to be reassured, but for Canadians trying to figure out how a series of ostensibly unrelated global bank failures will affect them, it’s been 10 years this year. Becoming like the meme dog in the burning kitchen may not be the best plan either.

After last week’s market turmoil, the unease continued over the weekend. Money market funds increased by $286 billion in his two weeks as people withdrew their deposits from banks, according to a new report on Sunday. Also on Sunday, International Monetary Fund Managing Director Kristalina Georgieva warned audiences in Beijing. Growing risk of global financial instability.

As an equity stake in a leading global investment bank based in Frankfurt Deutsche Bank fell 14% in early Friday trading and U.S. Treasury Secretary Janet Yellen held an unscheduled in-camera Emergency meeting of the Financial Stability Oversight Councilit was clear that what seemed like a lone failure of an overstretched Californian bank was still having ripples around the world.

Yellen told depositors last week that U.S. banks are safe and sound. Calming words are nice, but emergency meetings aren’t completely reassuring.

The phenomenon of financial contagion is not new and has been extensively studied.

“The financial contagion describes the cascading effects of an initial idiosyncratic shock to a small part of the financial system on the whole system,” explains the collapse of the Silicon Valley Bank (SVB) about two weeks ago and the subsequent sounds like a discussion of the events of Handbook for safeguarding global financial stability.

Experts know that such a cascading chain of events can be difficult to stop, but financial experts, who are deeply embedded in the same financial system, believe that the problem has inherent fixable consequences. I would like to explain very reasonably that it is limited to the cause. .

A man walks past the offices of Deutsche Bank in London, England, earlier this month. The German giant’s share price plummeted 14% at some point on Friday morning, though turmoil in the banking sector had been hoped to nip the buds in the bud. (Toby Melville/Reuters)

Risk of crisis ‘very limited’

“So far, the problem has been centered on regional banks in the United States and certain weak entities in Europe,” said a report published on Friday by Dutch-based ING, whose shares also plunged on the day. Europe’s problems have been more or less dealt with by rapid intervention by the Swiss government and central bank.

“This greatly limits the likelihood of a widespread systemic crisis,” said the report. Market turmoil: How not to create drama out of crisis…yet.

A very difficult question to answer in the heat wave is what is causing the contagion, and choosing the right analogy. Or is it like the snow on top of the financial mountain piled up during a period of low interest rates and loose lending?

A white-haired woman wearing a black suit and scarf.
U.S. Treasury Secretary Janet Yellen testified before the Senate Finance Committee in Washington on March 16, reaffirming the health of the U.S. banking system, but called an emergency meeting on Friday. (Mary F. Calvert/Reuters)

According to Jacqueline Best, professor of political science at the University of Ottawa who has explored past inflation and market volatility and is currently conducting research as a visiting professor Holdsworth at the University of Manchester, UK, the analogy is unclear. The fact that once a crisis begins, the contagion is perpetuated.

As someone who studies financial crises, she says her feelings are torn apart.

“It’s an intellectually fascinating time for me, but I’m personally very worried,” Best said by phone from Britain as European markets closed on Friday.

In a theoretical sense, the contagious market ups and downs are a combination of psychological and real factors, the “animal spirit” advocated by John Maynard Keynes during the Great Depression after the 1929 market crash. She said it was tied to the concept of Enthusiasm is replaced by fear.

Looking for buried corpses?

In the current case, the flaws found at SVB and Credit Suisse mean everyone is looking for similar flaws elsewhere.

It’s a well-known notion that rising markets can mask a lot of unrecognized creative accounting, risk-taking and outright fraud.

That’s the concept that ebb tide shows for someone who was swimming naked. But Best has a more macabre analogy.

Man looking at his computer surrounded by monitors at the stock exchange
Traders are at work on the floor of the New York Stock Exchange in Manhattan on Thursday. . (Brendan McDiarmid/Reuters)

“Without a good grasp of where bodies are buried, crises can fly from sector to sector, institution to institution, country to country,” she said.

“The self-contained dynamics of the market make a lot of sense,” said Best. “Once you see others selling or withdrawing their deposits in bulk, it makes sense to do the same as soon as possible.”

Another real contagion is the unintended consequences when solving one problem leads to another. Last week, US Federal Reserve Chairman Jerome Powell warned of the effects of a “tightening of credit terms.”

falling dominoes

Another unexpected effect was caused by financial tools aimed at preventing bank failures.

Until last week, few Canadians knew of AT1’s existence. Now, special bonds designed to help distressed banks have their own cascading effects after financial institution closures. Credit Suisse’s AT1 hits $17 billion on worthless paper.

It’s hard to imagine in advance the chain of events that will lead to the next toppling domino. It may be even more difficult for Canadians to consider how a global crisis will affect them.

Canadians like to complain about their banks, but Best points out that Canada’s few large, well-regulated banks have been a bulwark against previous crises, including 2008. .

“We have done better than many other major economies,” she said. “But having said that, it was also pretty miserable.”

We are part of a global system that, if global finance deteriorates sufficiently, if the economy faces a deeper recession, could impact politics, business, budgets, jobs and real estate. You may find bodies buried in Canadian institutions.

“This is of particular concern to me because of the vulnerabilities that Canada has right now, including the huge amount of debt it has,” Best said. It’s clear that there is,” he said.

ING is not alone in its report to say that a widespread systemic crisis is unlikely. But rather than saying ‘okay’, being a little frightened and a little cautious may be a good strategy for the country and individual Canadians.

You may also like

technologistmag (1) (2)

News bulletin today is the Top North American Website, which bring the latest updated and verified news to public. News which are accurate and verified from source.

Editors' Picks

Latest Posts

Copyright ©️ All rights reserved. | News Bulletin Today