In the first of this four-part Big Question, industry leaders and commentators reflect on the last ten years and discuss how the financial system has improved since the Global Financial Crisis (GFC), where more work needs to be done and what could trigger the next crisis.
Magdalena Polan, senior economist at Legal & General Investment Management
While economies can be 'happy' and function well in various ways, those that suffer crises do so for a surprisingly small number of reasons. The 2008 crisis was no exception.
A quick rise in debt, often used to buy speculative or unproductive assets (like property), excessive expectations of price increases (a force behind many bubbles in the past), relaxing of financial regulation, and new sources of cheap capital all led to an unsustainable, debt-fuelled rise in house prices and increasing financialisation - and thus impact - of a few inflated asset classes on the world economy.
Since then, we have hopefully learnt that it is important to watch for these types of imbalances. Also, that recovery from a bubble and debt crisis takes a longer time than from an average recession, and that extraordinary measures are sometimes needed to restore confidence and normal functioning of the economy and markets.
These lessons should be useful in avoiding the next crisis. While we cannot say with certainty where it will come from, vigilance and balanced management of the economy and financial sector - and our own expectations - seems to be key to avoiding crises and disorderly adjustments in the future.
Colin McLean, CEO at SVM Asset Management
In the last ten years, investors have learnt that holding cash or being short can be a career risk. The new perspective on risk encourages full investment in portfolios. And bond investors appear to be willing to sacrifice credit quality and liquidity for a performance edge.
Alternatives are also a bigger risk now. Some less well understood, and potentially less liquid, asset classes have grown substantially since 2008. Investors have flocked to emerging markets, property, infrastructure, hedge funds and bonds.
These asset classes are characterised by lower liquidity and less transparency on prices. Some even create an illusion of offering greater liquidity to investors than there is in reality in the underlying assets.
Central banks and politicians are likely to feel the need to respond, as in 2008, but the US will not repeat its derivatives market bail-out. The response to Lehmans seems to have pushed risk-taking into other areas.
Markets can expect intervention in the next crisis, and financial institutions, including banks, are stronger. But regulation may make it harder for buyers to step-in, with investment bank capital and investment managers now more tightly controlled.
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