Stock prices are nervously high, bond and real estate prices are under downward pressure, cryptocurrency assets have sustained falls and global debt is at record levels. One common factor behind these coinciding and worrying trends is that much of the world is living on excess credit. Payment is now due.
Another is how markets have bloated as financial systems fail to properly channel savings into good investments.
This all suggests the coming correction in financial markets will be more “shocking” (in all senses of that word) than previous cases. It is likely to result in a dramatic reset of financial regulation architecture.
Excess credit began in earnest following the collapse of the dotcom bubble when the prices of tech stocks on Wall Street crashed by nearly 80 per cent, scaring financial authorities into taking supposedly remedial monetary action to ward off feared economic recession as stock market wealth evaporated.
Recession was again bought off on a much more ambitious (dangerous) scale with the onset of the global financial crisis in the late 2000s, after which hundreds of billions of dollars of monetary and fiscal stimulus were injected into Western economies by central banks and governments. China also applied massive stimulus, although via policy-directed state institutions rather than simply throwing money into the market.
Interest rates were cut by central banks, led by the US Federal Reserve, to record lows. Central banks also referred to the Bank of Japan’s experience with quantitative monetary easing, which saw them purchase huge amounts of government bonds and private securities to boost financial liquidity. The aim was to get money flowing more freely and faster. A much more severe recession and mass unemployment were probably avoided or ameliorated by these actions.