Bear Stearns 10 Years Later - Two Different Articles, Article Number Two May be the Most Important
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Bear Stearns 10 Years Later - Two Different Articles, Article Number Two May be the Most Important

By Feux Follets following x   2018 Mar 14, 1:00am 66 views   0 comments   watch   sfw   quote     share    

Ten Years after Bear Stearns, U.S. Financial Stability Is again in Danger.

Banks are pushing for deregulation and roll backs of Dodd-Frank’s regular check-ups on their financial health. We should be worried.

The great financial crisis with its peak in the fall of 2008 was not inevitable; it could and should have been prevented. Had it been, the economy would not have lost trillions of dollars, millions of Americans would have been spared eviction and unemployment, and the U.S.’s vibrant financial sector would have remained intact.

But few saw a crisis of these proportions coming: Almost no one raised red flags when the first mortgage originators filed for bankruptcy, or when a roster of medium-sized banks experienced liquidity shortage.

Even when margin calls began putting pressure even on larger financial firms, and credit lines that had been put in place to provide only short-term, stopgap measures were running hot, almost no one sounded alarms.

Every incident was eyed in isolation even as, slowly but surely, stress built in the system as a whole—as it always does in finance—from the weaker, less resilient periphery of mortgage originators to the very core of storied investment banks whose ultimate fall threatened to bring down the entire system.

The 16th of March of this year will mark the 10-year anniversary of the marriage between Bear Stearns and JP Morgan Chase, which was arranged and co-financed by the Federal Reserve.

It was by no means the beginning of the crisis; rather, it marked the beginning of the end. It was the final stage in which financial firms at the core were still able to keep their heads above water; however, fearing for their own survival, they would extend another lifeline to fellow banks only with government help. By September, it took a massive government bailout to prevent a financial meltdown.

Waiting for the Chinese Bear Stearns

Unregulated, speculative lending markets nearly brought down the global financial system 10 years ago. Now, Western banks are exporting this failed model to the developing world.

‘What a difference a decade makes’, mused Mark Carney, the head of the Financial Stability Board (FSB), in a recent speech. Carney was measuring, and applauding, regulatory progress since shadow banking brought Bear Stearns down in March 2008 and Lehman Brothers six months later, and since 2013, when he warned that shadow banking in developing and emerging countries (DECs) was the threat to global financial stability. A lot has changed since.

Shadow banking is no longer used pejoratively. The IMF recently noted that DEC shadow banking ‘might yield greater efficiencies and risk sharing capacity’.

In scholarly and policy literature, DEC shadow banking is portrayed as an activity confined by national borders, connected closely to banks that move activities in the shadows, circumventing regulation or financial repression, complementary to traditional banks that underserve (SME) entrepreneurs, be it because of market imperfections or the priorities of the developmental state (China). Another C is relevant for China: constructed by the Chinese state as a quasi-fiscal lever.

After Lehman, China’s fiscal stimulus involved encouraging local governments to tap shadow credit, often from large state-owned banks, through Local Government Financing Vehicles.

Yet systemic risks pale in comparison to those that gave us the Bear Sterns and Lehman moments, since (a) complex securitization and wholesale funding markets are (still) absent and (b) DECs have preserved autonomy to design regulatory regimes proportional to the risks posed by shadow banks important to economic development.

At worst, DECs may have to backstop shadow credit creation, just like high-income countries did after Lehman’s collapse.

The ‘viable alternative’ story has one shortcoming. It stops short of theorizing shadow banking as a phenomenon intricately linked to financial globalization. In so doing, it misses out a recent development.

The global agenda of reforming shadow banking has morphed into a project of constructing resilient market-based finance that seeks to organize DEC financial systems around securities markets.

The project re-invigorates a pre-crisis plan designed by G8 countries—led by Germany’s central bank, the Bundesbank—together with the World Bank and the IMF, to promote local currency bond markets, a plan that G20 countries endorsed in 2011.

As one Bundesbank official put it then: “more developed domestic bond markets enhance national and global financial stability.

Therefore, it is not surprising that this is a topic which generates an exceptional high international consensus and interest even beyond the G20.”

#Economics #FinancialMeltdown #BearStearns

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