Global Financial Crisis II on the way?

Renowned economist warns conditions look like 2007 all over again – but worse

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

William White, the former chief economist at the Bank for International Settlements (BIS), says the hunt for yield is leading investors into high-risk instruments, and it looks like 2007 all over again.

Mr White says the current search for yield is a phenomenon reminiscent of the exuberance prior to the global financial crisis, which began in 2007-08. It comes at the same time as the US Federal Reserve prepares to start tapering its quantitative easing program, withdrawing liquidity from the global markets and could go “badly wrong”.

“All the previous imbalances are still there. Total public and private debt levels are 30 per cent higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle,” said Mr White. He added that the world had become addicted to easy money, with interest rates dropping at each crisis, leaving little in reserve for central banks to use, should another crisis unfold.

Australia managed to escape the effects of the first global financial crisis thanks to a strong resources sector, limited exposure by our major banks to the US and Europe, and steps taken by the RBA to limit the damage. But we may not be so lucky the next time.

In the five years since Lehman Brothers collapsed, global banks are bigger and financial systems more closely intertwined. A shock in one part of the system is now much more likely to transfer into other areas. We could see credit markets close, as they did during the GFC, which would cause issues for Australia’s major banks, including ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC). Without access to credit markets, banks could be forced to stop lending locally and call in loans to be repaid, which has serious implications for our economy.

Foolish takeaway

While that might be the ‘doom and gloom’ view, Mr White is famous for highlighting the wild behaviour in debt markets before the global financial crisis hit in 2008. In a worst case scenario, we could see the RBA forced to bail out one or more of the banks, most likely leaving shareholders with nothing.

Looking for a dividend-paying stock outside of the banks? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »