Financial Market Cycles, Globalization, and the Current Banking Crisis

The Current Cycle still has a long way to go. The crisis has demonstrated how all of the elements that will form the Basle II pillars, can fail in a G7 economy, including market discipline. Many factors contributed to the crisis, including greed, badly designed compensation structures, and failures in risk management. But two factors dominate others - the rapid growth in global liquidity and the permissive regulatory environment. Real interest rates were very low in the first half of the decade, and there was little regulation around complex products such as collateralized debt obligations and credit default swaps. When the credit crisis intensified , policy mistakes were made. Bail out packages never got ahead of the markets, and many have suggested that the way in which the Lehman's collapse was handled led to a breakdown in trust among financial intermediaries. From that point onwards, the challenge became how to prevent a collapse of the global financial system and deep recession. The speed with which the crisis is affecting economic activity around the world is staggering. Most OECD economies are already in recession and growth in Asia is arguably slowing more rapidly than at any other time since 1990. Coming after the rise in food and energy prices, many developing countries are now being hit extremely hard. It is a dramatic shift from a year ago when we were experiencing the strongest period of global growth in 40 years.download