World Economy

CBs Still Struggling to Contain Widespread Financial Turmoil

CBs Still Struggling to Contain Widespread Financial TurmoilCBs Still Struggling to Contain Widespread Financial Turmoil

On May 8, central bank executives from across the globe gathered in a hotel in Tokyo. The meeting, called by the Bank for International Settlements, was a rarity in that it was held in a city other than Basel, Switzerland, where the bank is based.

Many participants were relieved by news that came earlier that day—centrist Emmanuel Macron had won the French presidential election. The result boosted hopes that the global wave of populism—first apparent last year when UK voters opted to leave the European Union—can be moderated, Nikkei reported.

But it is too early for unbridled optimism. After nearly a decade, central bankers are still struggling to contain widespread financial turmoil that has entirely changed how the world looks.

It has been 10 years since the subprime mortgage fiasco first emerged in the US. In 2007, many holders of these mortgages began defaulting. Wall Street had gorged on the collateralized debt obligations that pooled these easy-to-get mortgages together, and the increasing default rate set off a crisis that unfolded in four stages.

The impact of subprime mortgage defaults quickly spread throughout the US financial sector. Within a year, Lehman Brothers and other big Wall Street marques had disappeared. The financial paralysis that ensued spread to global financial markets, too.

The global circulation of funds all but seized up, throwing economies around the world into turmoil. Officials from Japan, the US, Europe and emerging economies got together to discuss how the financial system could be resuscitated and the global economy reinflated.

As economies slumped, tax revenues fell. Government spending measures to revitalize economies swelled debt levels. This heightened the crises in Greece and certain other European nations. US Treasurys were downgraded. In the end, governments had to both clean up the mess and pay up.

Negative and visible consequences—prolonged economic slumps, widening wealth gaps and tax revenues being redirected to rescue banks—began amplifying people’s anger against current political systems. Populism, isolationism and anti-globalism emerged. Brexit and Trump happened.

While governments were paralyzed and dysfunctional, central banks had no choice but to take up the fight on their own. They squeezed out measures and pulled monetary easing levers marked “The Last Option.” This put them on spending sprees; they bought up government and corporate bonds and later introduced negative interest rates.

While taking this road has begun to show positive outcomes, it will also require massive repair jobs someday.


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