Category Archives: Banking

Banking, Economic, Government, IMF, Politics, Society, United States

Trump’s economic agenda collides with fragile financial systems

FINANCIAL ECONOMY

THE International Monetary Fund (IMF) is renowned for its rational level-headedness and is the calmest of all the global institutions. But when these usual and calm ideals are abandoned by technocrats to sound the alarm on the political roots of global financial instability, it’s time to pay close attention. The IMF is warning of a non-negligible risk of a $1tn hit to global output, as Donald Trump’s erratic “America first” agenda (part oligarchic enrichment scheme, part mobster shakedown) collides with a perfect storm of global financial vulnerabilities.

Such a shock would be equivalent to around a third of that experienced in the 2008 crisis, and would be felt in a much more fragile and politically charged environment. This time, the crisis stems not just from volatility in the markets, but from the politics at the heart of the system governing the US dollar. The IMF’s latest Global Financial Stability Report sees the danger in Trump’s trade policies, especially his “liberation day” announcements, which have pushed up America’s effective tariff rate to the highest in over 100 years.

The IMF has given notice to investors that Trumpian instability was taking place as US debt and equities – especially tech stocks – were overvalued. It cautions that hedge funds have made huge bets that have gone sour, requiring them to sell US treasuries for cash and potentially deepening the chaos in bond markets. Ominously, the IMF draws the comparison, first made by the analyst Nathan Tankus, with the “dash for cash” in 2020 during Covid. Then, the Federal Reserve rescued US treasury markets directly. Developing nations, already grappling with the highest and real borrowing costs in a decade, may now be forced to take on even more expensive debt just to cushion the blow from Trump’s new tariffs, risking a much feared “sudden stop” in capital flows.

At the heart of this chaos stands the US, the very country met to uphold the global financial architecture. Troubling, too, is the warning from Columbia University who have wondered whether the markets had begun to “sell America” after US long-maturity bond prices fell precipitously. The thinking is that markets were no longer responding to economic fundamentals but to politics as a systemic risk factor. In this case: Trump’s tariff threats and his increasing political pressure on the Fed’s chair, Jerome Powell.

Trump’s relentless attacks on the Fed chair have only added to capital flight from US equities, bonds, and the dollar itself. The money is fleeing to safe havens such as gold. Some of the loss has been clawed back, but at what cost? Investors aren’t just nervous about inflation or growth – they’re hedging against political chaos. That might explain the seemingly divergent IMF messaging: blunt systemic warnings in its report versus the soothing market-facing comments from a senior official at the IMF’s press conference. This is central bank diplomacy. The institution is signalling that it is worried while trying not to spark a self-fulfilling panic in treasuries and the dollar.

The real issue and concern here is not technical dysfunction in treasury markets or the mechanics of the Federal Reserve, which are the underpinning and bedrock of the global financial system. It’s about the politicisation of the monetary-fiscal nexus under a Trump regime that is fundamentally hostile to the norms of liberal-democratic governance. When even the dollar is no longer a safe haven, what – or who – can be?

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Banking, Britain, Economic, Financial Markets, Government, Politics, Society

Financial deregulation of the City: too risky by far

BRITAIN

THE UK Government has launched a consultation about whether it is time to lighten the rules governing alternative asset managers, including private equity and hedge funds, in the belief that doing so will boost growth.

That is radical because, in its desire to ensure the City of London remains attractive post-Brexit, the government seems to have forgotten one of the major lessons of the 2008 financial crisis: when regulation is lax, risks accumulate. And there is little evidence to support this idea, but every reason to think it could exacerbate systemic risks.

The proposal is consistent with the Treasury’s belief that expanding the financial sector will deliver economic prosperity. It has suggested that post-crisis regulations went “too far”. Those regulations included an EU directive targeting alternative investment funds. Before 2008, these funds operated mostly in the dark. There was no means of systematically tracking the leverage they were using, nor the dangers this might pose.

Under the EU rules, leveraged funds managing Euros100m or more in assets had to comply with strict reporting requirements and hold enough capital to absorb losses. The Chancellor is now considering lifting that threshold to £5bn, which would exempt many funds from the full list of EU rules. It will fall to the Financial Conduct Authority to decide which rules to apply. This is troubling.

The FCA has been instructed to encourage financial “risk-taking”, and the regulator has boasted about slashing “red tape”. Taken together, this sounds like a recipe for recklessness. Though the marketplace for private equity and hedge funds was too small to cause a crisis back in 2008, it has since tripled in size. Many private equity funds have started borrowing from shadow banks, which aren’t subject to the same regulations or capital requirements as normal banks. Others have begun taking on even more debt than usual. The Bank of England raised the alarm about these risky practices in 2023, and has suggested that mainstream banks may be unwittingly exposed to the industry. Hence, these are reasons for more financial oversight and discipline, not less.

If the FCA loosens the rules, fund managers will be less constrained in their dealings. They lobbied to have the EU directive watered down in 2010, and the UK was one of the few countries to oppose the rules. Then, as now, the government wanted to protect the City, believing it to be a goose that lays golden eggs. This antipathy towards financial regulation was a prelude to the “Singapore on Thames” worldview promoted by Brexiters. Hedge fund and private equity managers donated heavily to their cause: a study of Electoral Commission data by the academics Théo Bourgeron and Marlène Benquet revealed some £7.4m was donated to the leave campaign, as opposed to just £1.25m for remain.

The Treasury seems to be of the belief that unless the City gets what it wants, Britain may lose its fund managers to countries such as Luxembourg. There are many reasons to be wary of liberalising finance. One is that it will hinder, rather than help, economic growth. Research suggests that once the sector exceeds a certain size, it starts to become a drag on growth and productivity. A study from the University of Sheffield found that the UK lost out on roughly three years of average GDP growth between 1995 and 2015 thanks to its bloated financial sector. Watering down regulations might be helpful for fund managers who like to take huge risks, but it is hard to see who else would benefit.

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Banking, Britain, Economic, Government, Politics, Society

Carney says leaving the EU could restore faith in democracy

BREXIT

THE Bank of England Governor has said that Brexit could restore faith in free trade and democracy if the UK leaves the EU with a deal.

In a statement that is sharply at odds with his previous warnings that Brexit could spark chaos, Mark Carney said that a managed departure would show voters that they matter and encourage them to trust the parliamentary system again.

But he also warned that a No Deal Brexit would spark an economic shock – something which he says the whole world should be trying to avoid.

The Governor said millions of workers feel let down and left behind by globalisation – and the only solution is to give power back to the people.

He added that a Brexit deal may be a step towards a world where families are comfortable with free trade because they feel in control.

The Governor said: “In many respects, Brexit is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability.

He said Brexit could lead to new “international cooperation”, allowing for better cross-border trade deals and a more effective balance of “local and supranational authority”.

Mr Carney’s backing for Brexit if a deal is struck marks a major change of tone.

He has long been accused by Eurosceptics of opposing our departure from the EU and whipping up Project Fear.

And in the run-up to the referendum, he was attacked for politicising the Bank of England when he claimed Brexit could trigger a recession.

Last year, Mr Carney claimed the vote to leave had cost households £900 each by damaging economic growth – and he has always been one of the loudest critics of No Deal.

The Bank also claimed No Deal could tip the UK into its worst recession for a century, knocking a third off house prices and triggering a dramatic surge in unemployment.

Mr Carney warns again that a deal is needed to avoid chaos – although he does sound more upbeat about the future following an orderly exit from the EU than he has done previously.

The Governor said Britain’s departure from the European Union comes at a time of growing risks for the global economy. The Canadian also said that No Deal would be “a shock for this economy”, and that UK investment has not grown since the referendum of 2016 was called, saying it had “dramatically underperformed”.

Mr Carney used his speech – given to senior business figures at London’s Barbican – to warn them that China is increasingly risky and businesses around the world are taking on worrying levels of debt.

He said: “China is the one major economy in which all major financial imbalances have materially worsened. While China’s economic miracle over the past three decades has been extraordinary, its post-crisis performance has relied increasingly on one of the largest and longest running credit booms ever.

A 3 per cent drop in the Chinese economy would shave 0.5 per cent off the UK, he warned.

On Corporate debt, he said a surge in high-risk business lending has worrying echoes of the US boom in unsustainable loans which led to the 2008 financial crisis.

Mr Carney also took a swipe at Donald Trump, who has cracked down on imports from China. The US President once tweeted: “Trade wars are good and easy to win.”

Mr Carney batted away Mr Trump’s casual brag, saying: “Contrary to what you might have heard, it isn’t easy to win a trade war.”

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