Economics columnist Martin Wolf doesn't want to predict when the world economy will face another financial crisis. But he tells Yahoo Finance editor in chief Aaron Task, more turmoil is “more or less inevitable” because “nothing profoundly changed,” since 2008.
The Financial Times’ chief economics commentator says economic growth is too closely tied to debt. Wolf’s new book, “The Shifts and the Shocks: What We’ve Learned—and Still Have to Learn—From the Financial Crisis,” looks at how dependent world economies remain on the creation of money and credit by financial institutions. These banks, he says, are "highly leveraged, highly integrated with one another and very, very complex." Wolf says that in some respects, the situation has gotten worse because there are fewer institutions today, making them truly "too big to fail."
Not much is being done to better regulate these institutions, says Wolf. In the immediate aftermath of the crisis, Wolf feels then-Chairman of the Federal Reserve, Ben Bernanke, then-Treasury Secretary Henry Paulson and his successor Timothy Geithner took appropriate action. Wolf supported TARP, the Troubled Asset Relief Program, which he believes kept the financial sector afloat. He thinks the program was necessary and reduced economic fragility in the short-term. But beyond the rescue, there was no reform.
Wolf believes regulatory reform has fallen short largely because the oversight became so complex. However, politics also played a big role. Banks and financial institutions have used their lobbying clout and ended up with fairly lax regulations. The argument the banks have made is that tighter regulatory oversight slows growth. Wolf believes regulators have become intimidated by these claims.
The banking industry often outsmarts any regulatory progress made. “Banks have such a powerful interest in finding ways around regulation," Wolf says, and they always succeed at it. Wolf fears this is putting us "back where we were" before the crisis happened.
So how can the broken system be fixed? Wolf says the first step is to make world economies less dependent on debt. He thinks the leverage of the banking system needs to be reduced and capital requirements should be boosted. He believes banks have so little equity and as a result have too much risk. Wolf also radically proposes moving to a 100% reserve banking system which would essentially require banks to have the full amount of cash on hand and ready for withdrawal if need be.
His ideas are big, but Wolf says radical reform of the financial system is necessary to put the world economy on steady ground. Right now, he says, there is still “incentive for the people inside” to play “the leverage game,” and it’s just too dangerous.
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