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Ten years have passed since the collapse of Lehman Brothers. Did the world learn anything from the 2008 financial crisis? Are we heading for the next economic disaster?
Rush in quick. Get out fast
Speaking to CNBC’s "Crisis on Wall Street: The Week That Shook the World" documentary, Warren Buffet commented that another financial crisis is inevitable because of human nature, jealously and greed.
"People start being interested in something because it's going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren't. And their spouse is saying can't you figure it out, too? It is so contagious. So that's a permanent part of the system."
Because of greed and fear of missing out, Singapore bitcoin buyers crashed two bitcoin ATM machines last December. Two days before they purchased the cryptocurrency, Bitcoin prices peaked at USD19,340 on December 6, 2017. (Read my blog post “Lessons learned from the fall of bitcoin”.)
As I am writing this post, the price of Bitcoin is USD6,446 - exactly three times lower than its peak. Analysts predict the price of Bitcoin will continue to drop until next year.
When an asset bubble is deflated, the people can now see the emperor has no clothes on.
Where are the analysts who once claimed that Bitcoin is Wall Street’s next big thing and the price will hit $400,000? It is the same financial media with quotes from the same group of “experts” then and now.
Who chased the price of bitcoins for fear of missing the next big thing? Who couldn’t wait to dump the cryptocurrency when prices drop?
Who acquired land sites at record prices? Who queued to buy new launch projects at prices that set new highs in the district?
Who will dump their properties in the market first the moment they sense the market slump is coming?
Who lent generously to the housing and construction industries? Who will suddenly tighten borrowing and recall approved loans to avoid non-performing loans and bad debts?
Those who rush in out of impulse, greed and FOMO are often the ones who flee out of panic, desperation and irrational fear.
The same stakeholders, developers, agencies, banks, buyers and investors are contributing to the boom and the gloom of the property market.
We did nothing wrong
Warren Buffet told The Wall Street Journal that there is an important lesson learned from the 2008 financial crisis.
“Every company in the United States was a domino, and those dominoes were placed right next to each other … So when they started toppling, everything was in line.”
When the value of inflated assets started to fall, the house of cards collapsed.
The chain effect of Lehman Brothers’ bankruptcy triggered a two-year global financial crisis. A financial institution that was perceived to be too big to fail wiped off almost $10 trillion worth of global equities in one month’s time.
“When the dust settled from the collapse, 5 trillion dollars in pension money, real estate value, 401K, savings, and bonds had disappeared. 8 million people lost their jobs. 6 million lost their homes. And that was just in the USA.”
- Big Short Movie
Warren Buffet said in the CNBC interview that many Americans wondered what happened during the subprime crisis.
“All they knew is they did nothing wrong and their world was falling apart.”
Which investment banks were marketing those toxic loans packaged into mortgage bonds stamped with AAA ratings?
Interestingly, none of the senior executives behind these financial institutions were held accountable. They got away with fat pays and big bonuses, leaving six million Americans homeless, their companies to face lawsuits and (shareholders too) pay hundreds of billions in fines.
It is not about seeing justice being served. It is about getting other people to pay the price. We can’t solve a big problem with no pain. We can’t save the world with no sacrifice. When somebody makes a mistake, someone else is going to pay for it.
Every time when the top management make a wrong decision and revenue tumbles, do they resign collectively out of shame, or announce an internal restructuring with mass layoff?
Five years ago in September 2013, at the press conference to announce selling of Nokia Mobile Phone to Microsoft, Nokia's then CEO Stephen Elop ended his speech with tears in his eyes,
“We didn’t do anything wrong, but somehow, we lost.”
The Nokia employees did nothing wrong. But somehow half of them lost their job. Anyway, we are sure that Elop could swallow his sorrow and recover from this setback much easier with a €19 million (USD22 million) package.
Let them pay the price
During the good old days of quantitative easing, there is an infinite supply of cash at ridiculously low interest rates. With cheap money, developing countries can grow their economy; investors can buy assets worldwide; big corporations can acquire small companies; and entrepreneurs can build new start-ups.
But interest rates have risen seven times since December 2015. Borrowers start to feel the pain when there are four hikes in a year. Strengthening of the US dollar also means higher borrowing cost for debt-ridden countries and companies.
Economic turmoil often starts from emerging countries. It doesn’t take long for investors to sell off in these high-risk-high-return markets and retreat to the safe haven of US dollars.
On the other hand, US has always positioned itself as the world power by being a big brother to offer generous financial assistance to emerging countries. But not anymore. With Trump’s America First policy, US is no longer giving away any trading benefits and tax exemptions to them.
For the BRIC countries, the economy of Russia, Brazil and India is already in bad shape, leaving only China to fight a lonely (trade) war.
Venezuela used to be one of the richest countries with the world’s largest oil reserves (and most winners in beauty pageants). With falling oil prices, the country’s budget was gradually under deficit.
Without support from the US, last week Venezuela just turned to China to borrow another USD5 billion to be repaid in oil or cash.
To save a sluggish economy, the Venezuela government continues to print money until there is serious hyperinflation in the South American country.
The government keeps issuing new banknotes in higher amount. Banknotes with highest value has gone up to 100,000. Even so, the exchange rate of this banknote is under US one cent in the black market.
Venezuela’s inflation rate is expected to go up to one million percent this year. What does that mean? Anything that costs one dollar at the beginning of the year may go up to ten thousand and one dollars at the end of the year.
If shoppers in a department store don't take the merchandise to the cashier right away, the price can be doubled in two to three hours’ times.
Venezuelans are now resorted to bartering to get the food and groceries they need. There is serious shortage of food and children are starving. Women who are teachers and doctors in their country are now working as prostitutes in Colombia to keep their families fed.
Who is accountable for all these mishaps?
When the government has made a mistake, the people are left to foot the bill.
When somebody has messed it up, somebody else has to clean it up.
Have we learned our lesson?
Are banks really safer compared with ten years ago? Are they under stricter regulations since the last crisis? Can we trust our banks with our money?
The truth is: Banks in Europe haven’t quite recovered from the collapse of Lehman Brothers yet. The number of European bank branches is down 21 percent from ten years ago.
Under higher scrutiny in other continents, Europe also becomes a new paradise for money-launderers.
This September the largest Dutch bank ING was slapped with a €775 million (USD900 million) fine after admitting to money laundering. Denmark's largest bank Danske Bank is under investigation for money laundering with inflow from Russia and other countries. Brussels is under pressure to join the crackdown on money laundering and terrorist financing in the country.
In case anything happen, the banks believe that their government will bail them out. Because they are too big to fail. No one want to see the collapse of cards under domino effect.
But the financial sector is more complicated than ten years back: Banks have grown larger in size. Governments have printed more money. Buyers have created more asset bubbles around the world with cheap money. Investors have placed bigger bets in high-risk markets.
Global debt has jumped 40 percent since the 2008 financial crisis and reached a record high of $247 trillion in July. In the second quarter, US household debt hit an all-time high of $13.2 trillion - half a trillion higher than its previous peak in 2008.
The Monetary Authority of Singapore has warned local banks to be careful and stress test when underwriting. Property cooling measures with borrowing restrictions, lower loan-to-value and higher entry cost are in place to avoid overleveraging and overheating the property market.
But buyers and investors continue to drive up prices. Banks argue that it is justified to approve big housing and construction loans in tandem with rise in property prices.
With high liquidity and high margins, what better ways can banks achieve higher business targets and secure bigger market shares than giving out more loans in a small and competitive market?
We haven’t learned much from the last financial crisis. We haven’t done much to prevent the resurgence of an economic catastrophe. Are we waiting for another financial system meltdown and a full-blown recession before we will look into our faults seriously?