Australia is internationally known for avoiding the worst of the 2008-9 global financial crisis. In fact, we currently enjoy many of the upsides that came as a result of the post-GFC regulation, such as low interest rates and low inflation.
But what will happen when the next one hits?
Current state of play
It’s been ten years since the GFC, and according to Professor Fariborz Moshirian from the University of New South Wales Business School, there’s no immediate threat of another one. But it doesn’t mean we can sit on our haunches.
For one thing, we’re tackling an environment where the two superpowers, China and the US, have ever-rising levels of debt – not to mention the trade tension that’s brewing between them.
Professor Moshirian says that the risks have shifted over to other financial entities such as multinational banks, pension funds, super funds and shadow banks. There’s currently no global governance or international oversight over these entities, meaning a lack of operational transparency and higher levels of uncertainty.
In this environment of uncertainty, investors are less incentivised to invest, bringing down the number of “prosperous jobs” available.
“All these issues could be a trigger, if you like, for creating uncertainty and fear in the same way that Lehman brothers’ collapse has led to fear and what you call ‘systemic risk’,” Moshirian said.
Shock to the system
If another global financial crisis happens, it will be unpredictable. “What will happen is – generally speaking – there will be a shock to the economic system.”
“As a result of that, sometimes there will be a significant downturn into the economic activities which means there would be unemployment; consumer sentiments will drop; the retail sector will suffer sharply; and then gradually we see rising unemployment, defaults on mortgages, et cetera,” Moshirian said.
Trade would also be affected, he added.
The UNSW professor reiterated the link between stability in the financial sector and the behaviour of consumers.
“If something goes wrong with these major pension funds, large multinational banks, there will be [a] significant shock to the global economy, and suddenly the global economy could come to a halt.”
“Jobs will vanish; trade will slow down; [and] what we call liquidity crisis – suddenly once you go to the bank to collect your money, there’s no money in the bank – these sorts of things have happened in the past.”
“All these issues are linked to the financial market and the main players in the financial market are global banks, pension funds, like superannuation, and others, and to some extent equity funds.”