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Causes of the GFC - now more extreme

What caused the GFC?

  • The Bank of International Settlements says it was because there was too much debt.

  • Professor Warwick McKibbin: 'In a very real sense the global economy today looks very much like the global economy in 2006 – but worse. There has been a long period of low interest rates and a large build-up of public and private debt.' 'as interest rates rise, the distortions in the world economy built up over many years will begin to show signs of increasing stress.' 'the US sharemarket and other asset prices appear to be overvalued. On these high asset valuations has been built a huge tower of debt.' 'The problem this time around is that many countries, including Australia, have not addressed the fundamental internal structural problems and these countries have used excessively loose monetary and fiscal policy in an attempt to sustain economic growth.' ' the world is again vulnerable to a major financial crisis.' '

  • Gerard Minack: (one of Australia's best analysts): 'The most obvious symptom of (mis-deregulation) the financialisation of everything was the rise and rise and rise in debt. Household and corporate debt increased in most developed economies.' 'Most of the debt was used to finance the purchase of existing assets. This created a self-sustaining financial feedback loop: increasing debt funded asset purchasers, pushing up asset prices, improving borrowers' collateral and animal spirits – that is, the ability and willingness to borrow more – leading to more borrowing.' 'In many economies the asset purchase of choice was housing, creating a self-perpetuating cycle of home loan growth, house price appreciation, rising bank profits, and then more home loan growth.' 'The result was a simultaneous escalation of household debt and bank profits' (BB comment: In Australia this process has not yet begun to unwind yet [which points to the crisis ahead], but in US and Europe, the unwinding of this virtuous circle commenced during the Global Financial Crisis.)

  • The very high level of Aussie household debt virtually guarantees next recession will be nasty.

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