The Chinese like to go big and their zodiac signs – 12 animals: rat, ox, tiger, rabbit, dragon, snake, horse, goat, monkey, rooster, dog and pig – last a whole year instead of just one month like the our. But even in the West there has been a long zodiac sign that has lasted for a good ten years: the sign of the Crisis.
What happened in September 2008 and the severe instability of the following months have deeply marked the perceptions of the whole world. After more than a year of escalating tensions, on September 15, 2008, one of Wall Street's major stars collapsed into the dust, Lehman Brothers, the second largest investment bank. Floods of articles, books, stories, films have explored the great contradictions that led to the ominous event. Many believe that the Lehman bankruptcy could and should have been avoided. Be that as it may, the wound was deep. And the scars have not yet fully healed in much of the globe. Indeed, according to some observers, the 2008 crisis has activated a destructive mechanism that jeopardizes social stability and even the foundations of democracy. Undoubtedly, the social malaise grew when the crisis, from the initial financial phase, became real leading many businesses to close and many people to lose their jobs.
The impossibility or, in any case, the lack of adequate public interventions, an economic recovery that is insufficient to generate quality jobs, the worsening of inequalities in the distribution of income and wealth have allowed social unease to generate large pockets of discontent. Opinions on globalization and technological innovation – and, in the Euro-peripheral countries, on the European Union – have gone from being favorable to being against. New political classes proclaim themselves champions of the disadvantaged, often proposing solutions of a national dimension. The uncertainties in the American leadership, raised by Trump to question the free international trade that the USA had always promoted since the post-war period, the silent expansionism of China and Russian interventionism complete a gloomy international picture.
But what happened to banks and finance, the sector from which the crisis came? After a decade, can we say that banks and financial markets are safer than they were then? I would like to answer yes but I have strong doubts. First of all, it is worth remembering that, almost unanimously, it was recognized that the origin of the crisis was the change in the banking business model. For the most part, banks had reduced traditional intermediation - collecting deposits to make loans - instead accentuating their involvement in finance - generating assets issued on financial markets and also investing in them. However, a part of those financial assets (think of the subprime mortgage securitizations, but not only) were full of underestimated risks, precisely because the underlying debtors were no longer subject to accurate selection and monitoring actions, as the banks were abandoning traditional brokerage. This had increased systemic risk, which then exploded in 2008. In the face of this, it was to be expected that regulatory reforms would push banks to return to traditional intermediation, reducing their involvement in finance. Instead, the opposite happened. Basel 3 and the various other new rules have burdened traditional intermediation and not the financial investments of banks.
Thus, today banks are making even less lending and even more finance than they did in 2008. One could argue that today in many jurisdictions, including Europe, systemic risk is brought under control by the bail-in approach, which should let the banks in crisis fail by making the creditors of the failed banks no longer pay (according to the old logic of the bail-out). In fact, it is thought that savers who hold bank bonds or unsecured deposits will exercise control over the riskiness of the banks in which they invest. However, there are two things that don't add up. First, if many bankers, as the various crises have shown, have been able to fool the experienced and sharp-eyed supervisory officials, what can make us think that helpless savers will be able to do better? Second, bailout is not dead. Even in America, after the sudden failure of Lehman there have been waves of bailouts of large banking, financial and insurance institutions. And to think that in Europe some banking giants (e.g. Deutsche Bank) would be left bankrupt if ruined is wishful thinking. Thus the distortion known as "too big to fail" is still current in defiance of the statements of the bail-in. And this means that the sources of financial instability are still very active: letting medium and small banks fail does not solve anything because the systemic risk is generated almost entirely in the large ones.
The above casts some doubt that banks are healthier today than they were a decade ago, but perhaps financial markets have become more stable? Hard to think that. This essentially depends on the way in which the engine of the economy was restarted after the shock of 2008. Central banks in all developed countries have fully engaged in unorthodox monetary policies: Quantitative Easing (QE), which has structurally lowered interest rates on bonds. In this context, since the beginning of the world, investors have been looking for more attractive yields by buying securities issued by riskier national debtors or by less virtuous sovereigns. And this happened once again, resulting in a significant reduction in the yields paid by companies and sovereigns with low ratings for a long time. In a certain sense, a kind of financial bubble has been created induced by the underestimation of risks. However, with the fading of QE interest rates are moving up, e.g. in the USA, and the 'Bonanza' of low rates for riskier issuers is ending. Thus, strong crunches are already being felt in the weaker emerging countries – e.g. Argentina and Turkey – which book assistance packages from the IMF and for months the spread between junk bonds and US government bonds has been rising, causing growing tensions for the companies that issue those bonds. In short, the distortions introduced by QE will vanish with the disappearance of QE itself and the landing for the international economy could be stormy.
In conclusion, having had the astrological sign of the Crisis on our heads for ten years was difficult and tiring. And, scrutinizing the sky of banking and finance, no more favorable astral configurations are seen arriving.
