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Old illnesses seem far from cured"Is the next crash just around the corner?" is the question posed in an article by Peter Johnson last week on the Open Democracy website, while others warn that the seeds of the next crash are embedded in the rescue packages deployed by central banks and governments to try and deal with the present recession. There are also warnings that one of the most central instruments in place to attempt to deal with global warming – carbon trading – is badly contaminated with one of the dangerous cancers in the financial system which led to the 2008 crash.
Johnson wrote that Professor Nouriel Roubini of the Stern School of Business at New York University believes "we are already pumping up the next financial markets bubble, whose collapse will dwarf that of 2008". If he is correct, we face an unthinkable political and economic disaster.
Roubini, who predicted the 2008 crash in 2006, has been among the more prescient commentators on macro-economic trends. He recently argued that we are already pumping up the next, highly leveraged, asset price bubble.
Equity, oil, and commodity prices have risen sharply, far more than justified by economic reality.
Stock, bond and currency prices in emerging markets have increased by even greater proportions – a trend that is also detectable with the South African rand, which has spectacularly rose from a low of R11.80 to the dollar in October 2008, to R7.40 or there about at present.
Speculators at it again
With the very low interests rates maintained by the American Federal Reserve, speculators have been borrowing dollars and investing it in currencies and financial instruments in countries where the interest rates and yields are higher. While an investment bubble is created in the process, no or very little contribution is made to real productive economic activity.
“At the same time, the US dollar has fallen, and US bond yields remain broadly low and stable. The eventual and inevitable bursting of this bubble will lead to an even bigger price crash than we saw in 2008; and the inability of the main participants to repay the borrowing that supports this market activity, will lead to wholesale institutional collapses.
“Now whilst the easy money and near-zero interest rates of government and central bank policy have contributed to this asset price surge, the really dangerous aspect, Roubini believes, is a highly leveraged speculation against the US dollar, referred to as a carry trade. This bears translation into layman’s terms, since if Roubini’s fears are realised, we’ll certainly hear more of it before long,” Johnson wrote.
Climate change
On the front of the fight against climate change, the environmental lobby group, Friends of the Earth (FoE), last week argued that the instrument of carbon trading could trigger a new financial crisis.
The group warned that banks and investors are packaging carbon credits into increasingly complex financial products similar to the derivative products devised by bankers, and which were blamed for contributing much to the 2008 collapse of financial markets.
Prof. Peter Rayner concludes in his foreword to the FoE’s critique of carbon trading, "A Dangerous Obsession" that: “Far from proving to be an economically efficient instrument, carbon trading and offsetting have been beset by inefficiency and, in places, corruption.”
What carbon markets effectively do, is to facilitate the right to pollute. They are enabled by limits on emission reductions for countries, industries and/or companies. If the limits are exceeded, those obliged to stay within their bounds may purchase carbon credits, thus offsetting their emissions output.
Global carbon trading could, over time, grow into a multi-trillion dollar market if next month’s round of talks in Copenhagen for a deal on global warming expands on the cap-and-trade system.
It is FoE's view that an expanded trading system would not be able to deliver required cuts quickly enough to avert climate catastrophe.
In a nutshell, a global carbon market risks a “double whammy of financial and environmental disaster”.
