The relevance of all this to potential financial stability risks should be obvious from the 2008 meltdown, with a vast array of earlier financial crises also displaying similar characteristics. Context is of course always important, but in any post hoc analysis will all too often show evidence of deep seated ‘wilful blindness’, and no small amount of hubris. All too often, the proverbial ‘plot is lost’ when process becomes confused with procedure, in general because as humans we like to think that once we have understood a process, we can then apply procedures to improve our perceived control over a process, primarily in the business arena to allow greater ‘rent extraction’, i.e. larger profits. However a process in any given arena is never static, it is of needs evolutionary, adapting to an ever changing environment, and thus necessitating procedures, which will very often become dogmatic and static, to be as evolutionary, which is precisely where we find the seed beds for many a crisis, because the focus is on evolving procedures without a reference back to the changing nature of the process. One might say this is what is at the heart of Einstein’s famous quote that ‘we cannot solve our problems with the same thinking we used when we created them.’

I cannot even vaguely begin to scratch the surface of the myriad of signals suggesting that the procedures that markets have evolved to deal with the forces of financial repression and post-GFC regulation may be headed for stormier waters, the ‘rocks’ or even an iceberg. But I will try and highlight a few that have flashed up on the radar, some of which I have referenced in daily or weekly commentary.

It was former BIS chief Jaime Caruana who in 2015 noted that monetary ‘policy does not lean against the booms, but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap.’ He added that ‘systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent.’ This looks to be a very useful prism though which to consider the latest bout of central bank policy easing.


For instance there are the niggling truths about the deteriorating profile on non-financial corporate debt service ratios, perhaps no better exemplified than by the fact that according to Goldman Sachs (GS), non- financial cash balances are down $185 Bln over the past year, which according to GS IS the sharpest fall (11.0%) in percentage terms since 1980 (11%)!

Central banks may continue to wax lyrical about how the health of the banking sector is so much better due to regulations introduced since the Global Financial Crisis. But as I have pointed out for many a year, the fact is that bank balance sheet woes in the GFC were a symptom of the malaise, rather than ‘a’ or ‘the’ cause, which was financial market instrumentation and the risks which multiplied on bank balance sheets, and which now sit on the balance sheets of a broad array of shadow banking (hedge funds, private equity, venture capital, along with peer to peer and indeed pay day lenders) and non-banking entities (insurance, mutual, pension and ETF funds). Indeed the regulators will doubtless point out that the risks are much less concentrated and better and broadly distributed. But the fact remains that ZIRP, NIRP and QE and all the associated instruments of financial repression have forced, and continue to force ever more money out of the traditional fund sectors into private equity and other shadow banking entities, draining liquidity from the banking sector and regulated markets into the shadow banking sector and into ever more illiquid and untradeable assets in a desperate reach for yield, some of which will turn toxic in a downturn.

6 | ADMISI - The Ghost In The Machine | November/December 2019

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