2015 was quite a “thrilling” year. China’s stock market went on a rollercoaster ride, Greek debt crisis, aggressive monetary stimulation launched by the European Union, staggering Chinese production and Federal Reserve raised the interest rates.Fears among the public are heightened by the most recent crumbling oil price and an unstable Chinese stock market which resulted in the worst start to a new year in more than a decade in the global stock market. However, it appears the ghost of 2008 tsunami still haunts the future as the roots of the crisis are barely touched.
2008 Financial Crisis
The world is aware of the problems within our financial markets all along: moral hazard, too big to fail, asymmetrical information, lack of transparency and greed. Before the 2008 Financial Crisis, central banks and financial regulators ignore the risky behaviors of bankers. The financiers claimed to find ways to banish risks; therefore, irresponsible mortgage lending and collateralized debt obligations (CDO) in the United States were prevalent. The downturn of U.S. housing market exposed the fragility in the financial system. As the momentum starts, a ripple effect took down the complex chains of debt within the system. The financial crisis turned into the euro debt crisis in Europe. Princeton University economist Hyun Song Shin added that global banking system, particularly the European financial market assisted in fomenting the crisis. “They bought lots of dodgy American securities, financing their purchases in large part by borrowing from American money-market funds,” reported the Economist.
The result of the chain of events almost brought down the global financial system. In the U.S., the Federal Reserve Bank of Dallas calculated the accumulated loss could add up to more than US$28 trillion. Governments bailed out banks with tax payer’s money while massive fiscal and monetary stimuli were implemented. The resurgence of interest in Keynesian economics between 2008 and 2009 occurred as many policy makers’ implemented economic policies in accordance with the recommendation made by John Keynes during the Great Depression.
A volatile global financial market: China & Taiwan
Despite the stimulus, the global economy remains fragile and financial regulations in various markets are yet to be ameliorated. Nothing much has changed since 2008. The banks are still big or even bigger. The top five banks with the largest assets in the world now holds at least $US 2,600 billion each. The only difference now is that four of the top five banks are Chinese banks. As the banks grow larger, it is harder to implement effective rules to prevent moral hazard. Unfortunately, China’s market is the epitome of moral hazard. Major Chinese banks are owned by states and people believed the government will not let the financial and housing market go down. Nevertheless, in the recent events of the devaluation of Yuan and a plummeting stock market, reforms within the Chinese financial market are necessary for China’s economy remains dependent on government intervention. The banks in Taiwan have been pushing to Yuan-based investments and forming a closer relationship with Chinese financial market. However, many experts believe an open financial market without any corresponded measures could damage the small Taiwanese investors and the overall healthiness of Taiwan’s financial market.
“China has a major adjustment problem. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008,” warned George Soros.
Financial reforms in the U.S.?
The United States tried to make some changes in its financial system by passing the Dodd-Frank Act and implementing of the Consumer Financial Protection Bureau. The new consumer regulator “allows the government to dismantle a failing mega-bank without resorting to ad-hoc bailouts, a legal process that was sorely missing during the 2008 crisis.” Yet, the army of Wall Street lobbyists is as strong as ever. In 2015, Wall Street banks and companies spent $1.4 billion on their lobbyists to influence policy making in Washington.
Our global economy requires reforms, but its progress is threatened by political pressures. The policy makers and authorities in finance do not wish to jinx it when the economies are doing well yet a deep-cut wound would never heal with a bandage without medicine.