The doomsday cycle

[Joanne98]

Over the last 30 years, the US financial system has grown to proportions threatening the global economic order. This column suggests a ‘doomsday cycle’ has infiltrated the economic system and could lead to disaster after the next financial crisis. It says the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.



Over the last three decades, the US financial system has tripled in size, as measured by total credit relative to GDP (see Figure 1). Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it. These crises appear to be getting worse and worse – and their impact is increasingly global. Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse.

Figure 1.



http://www.voxeu.org/index.php?q=node/4659

[leveymg]

1. Economic crises, market bubbles and blowouts have an aggregate effect

that has weakened the ability of the Fed and other quasi-public authorities to pump liquidity back into the system and get lending going again. Tipping point.

[lonestarnot]

2. 1 out of 11 banks teetering on failure.

[jschurchin]

3. Not to worry.

Geitner will ensure that the banks are protected. You and me? We are just traction. Not to worry.