The Barbican cultural centre in London is currently hosting The Colour of Money: a season of films about finance, “from the gold rush to the credit crunch”. If Andy Haldane, one of the Bank of England’s most thoughtful policymakers, is right, they should clear some space in the schedule for Financial Crisis III.
Haldane warned in a speech on Friday, that we may be locked into what he calls a “three-part crisis trilogy”, with part I, the Anglo-Saxon crisis of 2008-09, and part II, the euro crisis, about to be followed by part III, the emerging market crisis of 2015 onwards.
Pointing to the latest turmoil in Greece – where elections take place on Sunday – and China, where a sharp slowdown and a snap devaluation has sent shockwaves through financial markets, Haldane said: “In my view, these should not be seen as independent events, as lightning bolts from the blue. Rather, they are part of a connected sequence of financial disturbances that have hit the global economic and financial system over the past decade.”
Haldane believes a “large slug of global liquidity” – effectively, a flood of cheap money – has “by turns inflated then deflated capital flows, credit, asset prices and growth in different markets and regions”. In other words, as central banks have battled to limit the fallout from economic crisis at home, they have simply inflated bubbles elsewhere. The underlying imbalances in the global economy have been left untouched; the overhang of debt from the boom years remains.
Haldane argues that about $600bn (£385bn) of capital “rotated out of crisis-afflicted advanced and into emerging market economies” in the wake of the Great Crash that hit developed economies after the subprime crisis in 2008-09.
Over the past 18 months, as the Federal Reserve has laid the groundwork for raising interest rates, “that cycle has turned decisively” and about $300bn worth of capital has flowed back out of emerging markets.
“As on the way up, where money has led growth is now following,” he says. Across a swath of countries, from Turkey to Brazil, Russia to Malaysia, sovereign bond yields, which determine the interest rate governments have to pay on their debts, are rising; commodity prices are falling; political instability is rife.
It’s hard to foresee precisely how Part III will end: as Haldane puts it, “it is simply too soon to tell how potent contagion from [emerging market economies] to the world economy will be.” But as Haldane points out, there must be a risk that it is at least as scary as Parts I and II.
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