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The top risk to the post-Lehman world

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Activists dressed as ‘slaves of the financial system’ rally in Frankfurt on September 15 on behalf of the 10th anniversary of the collapse of US investment bank Lehman Brothers which unleashed a global economic crisis. BORIS ROESSLER/AFP

The top risk to the post-Lehman world

When investment bank Lehman Brothers collapsed on September 15, 2008, Dr Axel Weber – then the president of Germany’s central bank and a member of the governing council of the European Central Bank – had a helicopter-view of the mayhem that followed, in the form of the worst global recession since the 1930s.

“There was huge uncertainty as to how we would navigate a difficult environment,” he recalled over coffee on the sidelines of the Singapore Summit on Saturday, which was 10 years to the day after the Lehman collapse.

“But the crisis management went reasonably well. We had a lot of government intervention but there were no other major casualties. At the time, it was unclear if we could achieve that.”

He added, with some relief: “The collapse of Lehman shook the foundations of the global financial system, but it did not lead to the collapse of the system.”

Now the chairman of UBS, the world’s largest private bank, the 61-year-old Dr Weber is a hard-wired economist, steeped in both theory and practice. He has taught economics at the universities of Cologne, Frankfurt, Bonn and Chicago, served on the board of the Bank for International Settlements, and is on the International Advisory Panel of the Monetary Authority of Singapore.

Unfinished business

While the global economic system survived the post-Lehman crisis, there is still unfinished business, he said. “Regulation has focused too much on idiosyncratic events – a single bank failure.” There was tighter regulation of the core of the financial system – namely banks. But a lot of banking activity then shifted to non-banks – the so-called “shadow banking system” – which is much less regulated.

For instance, the share of mortgages originated by non-banks in the United States has more than doubled since 2008, to almost 50 per cent.

“So, re-regulation was important, but it hasn’t happened holistically. The financial system is only as strong as its weakest links, and there are weak links outside banking that regulators need to address. So, if the next financial crisis has any similarities to the last, those could be the areas where the fragilities could show up.”

Dr Weber is also concerned that the authorities might lack sufficient tools to deal with the next crisis because of what he calls the “misalignment of policies” in major economies.

For example, the US has a strongly growing economy, but at the same time, a major fiscal stimulus and a tax reduction programme that is not fully funded. Germany has a housing market boom fed by low interest rates, which are likely to continue into next year. And in Japan, monetary policy is still in crisis mode even though the economy is doing quite well.

“So with these misalignments, there is less room for countercyclical policies, both fiscal and monetary.”

But that said, Dr Weber does not see any major disruptions for now – not even in the equity markets.

“In the US, monetary policy has not normalised as fast this time as it did in the past – the Fed has been very cautious,” he said.

“Yes, the current growth of asset prices has been sustained, but it was the flip side of QE [quantitative easing, the pursuit of easy monetary policies]. Several years of positive developments do not necessarily mean there will be a disorderly correction.”

He believes the rising US stock market can level off without a crash because there is still enough stimulus to keep the US economy humming this year and next. Ditto for other developed markets. Going forward, he sees weaker growth rates but no major recession. UBS still maintains a “slightly overweight” position in equities – meaning that stocks are still a good buy.

But right now, the top risk for the global economy, said Dr Weber, is trade tensions, especially between the US and China, which are “rising by the day”.

Huge surpluses

Last week, the US announced new tariffs on $200 billion worth of Chinese imports, to take effect from Monday. China has retaliated. The US has also started other trade disputes, including with Canada and the European Union.

“If these disputes also end with tariffs, that will set back globalisation as well as inclusiveness,” said Dr Weber. “We would not be able to bring more people into the global economy. My hope is still that because this is so obvious, governments will not escalate things beyond the point of no return.”

Bringing services into the negotiations could help defuse trade disputes, he suggested, noting that the US has huge surpluses in trade in services.

“If you look at current accounts rather than just trade accounts, the world looks a lot more balanced, including the relationship between China and the US, and the US and Europe."

“So I hope that as the authorities take a broader view and focus not just on trade but on the entire economic relationship, they’ll see more clearly that trade benefits everyone.”

The Chinese authorities as well as companies are moving towards this more holistic view, he pointed out. “Many Chinese companies are also big providers of services, and they also want global market access in that area.”

Vikram Khanna is the associate editor of the Asian Writers’ Circle, a series of columns on global affairs written by top editors and writers from members of the Asia News Network and published in newspapers and websites across the region.

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