This will be discussed today at the World Economic Forum in Davos.
The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned.
“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” said William White, the Swiss-based chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements (BIS).
“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said.
“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,” he told The Telegraph on the eve of the World Economic Forum in Davos.
“The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”
The European banking system may have to be recapitalized on a scale yet unimagined, and new “bail-in” rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.
The warnings have special resonance since Mr White was one of the very few voices in the central banking fraternity who stated loudly and clearly between 2005 and 2008 that Western finance was riding for a fall, and that the global economy was susceptible to a violent crisis.
Mr White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows.
Who would have thought it? QE on a massive scale and low interest rates which encourage everyone to borrow even more would result in total collapse of the financial sector..
Big banks brace for oil loans to IMPLODE! It’s all falling apart folks.
Firms on Wall Street helped bankroll America’s energy boom, financing very expensive drilling projects that ended up flooding the world with oil.http://money.cnn.com/2016/01/18/investing/oil-crash-wall-street-banks-jpmorgan/index.html?iid=hp-toplead-dom
Now that the oil glut has caused prices to crash below $30 a barrel, turmoil is rippling through the energy industry and souring many of those loans. Dozens of oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs.
Three of America’s biggest banks warned last week that oil prices will continue to create headaches on Wall Street — especially if doomsday scenarios of $20 or even $10 oil play out.
The financial pain has gotten so great that now there’s murmurs of a bail out for the U.S. oil industry, though it’s clear any assistance would run into political opposition.