Sowing Seeds of the Next Major Crisis
16/4/2012: It started out like "Mission: Impossible" but has ended up more like "Meet the Fockers," minus the comedy.
Western governments' emergency interventions in the financial sector during the 2007-2009 crisis and the more recent European turmoil have led to a messy relationship riddled with distrust and misunderstandings.
The situation is understandable in the short-term but untenable in the long-run.
In the U.S. and Europe, the private sector's dependence on government support is fostering behaviors—excessive risk-taking, distortions in capital markets and maybe even inflationary pressures—that could lay the foundations for the next crisis.
The story so far: Having plunged Tom Cruise-style into the skyscrapers of New York and London with bags full of money, Ben Bernanke, Timothy Geithner and their European counterparts find themselves unable to get out. The world desperately needs their low interest rates, generous injections of liquidity and periodic lubrication of financial markets.
So, like Jack Byrnes, Robert De Niro's brusque father in the Ben Stiller movie, they have parked their giant RV on the lawn of global finance even though they don't completely approve of what the other side of the family is up to.
The feeling is mutual, with financiers urging regulators and governments to get out of the way so they can return to business as usual.
Unfortunately, there is little "business as usual" around. Not at a time when Europe is in recession, the U.S. in the throes of an anemic recovery and even China is slowing down. And not when bank balance sheets are saddled with decaying leftovers of the crisis—asset-backed securities, bad loans and litigation—and vital parts of the system, such as derivatives trading, are gummed up by fears of new regulations.
Chronicling markets used to be like going to Tokyo for the first time: a unique experience that overwhelmed the senses with a barrage of stimuli. But in recent times, that seemingly infinite set of variables has been reduced to one: whether governments and central banks will step in again to help sluggish growth and a patched-up banking system. Read more. (Subscription required.)