Introduktion
Economics was originally not designed for the purpose of forecasting. This is precisely why when economists are pressed about predicting the next financial crisis, they turn to the annals of economic history.
While some may already be engaged in forecasting future crises, we seek to illuminate the historical context and timeline of such events.
We concur with the belief that financial crises, much like those of the past, will undoubtedly occur in the future.
However, the notion of a cataclysmic meltdown akin to the 2008 crisis, or perhaps even more severe, is a rather improbable scenario in the foreseeable future.
Innehållsförteckning
Lesson #1: Even crises that turn out to be small by historical standards feel at the time like the end of the world.
- Shock spotting
Lesson #2: Investors have to expect a financial crisis slightly more often than every three-and-a-half years.
Lesson #3: Every generation gets a ‘Big One’, i.e. a crisis that shapes their collective memory.
- What is the opposite of a crisis?
Lesson #4 is: Calm markets have historically tended to take quite some time before switching into crisis mode.
- The ingredients for disaster
Lesson #5: Capital-flow bonanzas, financial innovation, housing booms and financial liberalisation are the fundamental ingredients for financial crises.
- Doomsayers do not have a strong case right now
Assignments
Round 1: Comprehension and analysis
Round 2: Doomsayer’s speech
Utdrag
Considering the inherent rhythm and regularity of financial crises, along with the existing historically low market volatility, it seems unlikely that the next financial crisis will materialize before 2019 – approximately four years following the commodity crisis in 2015/2016.
A truly seismic financial event, which occurs once in a generation, should not be anticipated before 2025 – about 18 years after the Great Financial Crisis.
When we assess the four factors articulated by Reinhart and Rogoff, we can observe that only one partially applies.
One could argue that we've witnessed a surge in capital flows, particularly within the realm of fixed income, as interest rates have recently plummeted to new lows.
Furthermore, the remarkable rise of cryptocurrencies, epitomized by Bitcoin, reflects similar phenomena of excess.
However, the other three factors do not seem to be as prevalent. Financial innovation appears to be on the backburner, with many banks focusing on downsizing their operations and bolstering their capital reserves in recent years.
While some regions, such as Silicon Valley, tier-1 Chinese cities, Sweden, and Germany, have experienced housing booms, they are not as widespread as the housing bubble of 2007.
Furthermore, the most significant economy, the United States, remains distant from a major housing bubble.
Lastly, financial liberalization has yet to materialize, as the regulatory burdens have progressively increased on a global scale in response to the repercussions of the Great Financial Crisis over the past decade.
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