Ten Years After

It about that time again. For the next financial crisis that is. I was thinking about past financial crises and how there has been a significant event, as opposed to a bear market, about every ten years since the October 1987 stock market crash. And with the exception of the Bear Stearns fire sale in the spring of 2008 most of the serious crises have happened in the later summer or fall (there was the mini EU crisis in 2011, again in the later summer; there was also the tech wreck in 2002). But the really earth-moving events have happened in ten-year intervals. They are as follows:

October 1987 – Stock market crash

August 1997 – Asian financial crisis

September 1998 – Long Term Capital Management failure

September 2008 – Lehman Brothers bankruptcy

So if the calendar is any indication 2018 should bring some sort of financial crisis.[1] With no dark clouds on the horizon, like the LTCM warning signs or Lehman’s 2008 summer from hell, what could it possibly be this time around? I’m no soothsayer so I don’t have a prediction for what, if anything, may befall us in 2018. Maybe all this financial regulation has de-risked the banking industry. Maybe. It is probably unduly pessimistic to think we will get a crisis like 2008 anytime soon. The Great Recession was a generational event like the Great Depression of the 1930’s.

The other factor to consider is the role of the government in past crises, either through action or inaction. Remember these are the people who in the early 2000’s decided everyone should own a home even if they didn’t have any money. Not giving any thought to the potential impact on the securitization market that had been part of the mortgage industry since the 1980’s. What have they been up to lately that could push us towards the next crisis? Will the unintended consequences of financial regulation, or deregulation[2], entice the bankers back into risky behavior thus endangering them like they did in 2008? The banks have done some de-risking on their own so I give this scenario a low probability. But again these things are hard to predict.

The last two crises have been all about interconnectedness and the systemic consequences. The new financial regulations have done little to address this. But again we’re talking about the last war. While you’re busy looking at what happened in the rear view mirror you sometimes crash into something completely different. What could be the cause of the next crisis?[3] A cyber attack affecting some but not all financial providers? Perhaps a system failure affecting the global payments system? Who knows but I have a feeling we may get something we haven’t seen before. Right now nothing seems to be looming. So as singer/guitarist Alvin Lee once sang, “Skies are sunny…” [4] At least for now.

Happy New Year.

[1] We made it through 2017 unscathed.

[2] See the Treasury white papers of June and October 2017. There is already some evidence of banks taking on more trading risk as they try to amp up lackluster revenues and returns.

[3] J.P Morgan and Deutsche Bank have recently published research that posits that the next crisis could be caused by a massive liquidity disruption.

[4] “I’d Love To Change The World”, Ten Years After

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