Geopolitics represents the single biggest threat to financial markets, warned Ben Bernanke, former chairman of the US Federal Reserve, at an event in Toronto yesterday.
Speaking at the Swell event hosted by Ripple, Bernanke noted that the financial crisis of 2007-2008 was so severe because different elements of the financial system has become so interlinked that stressful conditions in one area soon spread to other parts of the system. However, he argued that the financial markets are systemically safer now and that the biggest threats to these markets come from external sources.
“The biggest risks [today] are geopolitical, I take seriously the North Korea situation and Iran, a lot of the things happening in the world that are political are related to populism and concerns about immigration, those are the biggest risks,” he said.
Bernanke pointed out that other threats to globalisation come from trade policy, highlighting potential changes to NAFTA as one particular policy that could be disruptive. Although he observed that the stock market is high, relative to historic criteria, Bernanke said that this shouldn’t be a major concern for US financial authorities.
“From my perspective, I think that what made the housing bubble so damaging in the recent crisis was not just the fact that prices went up and down – they’ve gone up and down again since without the same impact – it’s that they generated this massive financial panic, that’s what make things so severe. I don’t think that implications for the stability of the financial system are the same today,” he said.
Discussing how politics could have a negative impact on financial stability in the US specifically, Bernanke expressed consternation about attempts to repeal certain elements of the Dodd-Frank Act.
“We put in place since the crisis a set of rules by which, if it ever happened again, the government would be able to unwind an AIG or Lehman event in a way that is much safer and less disruptive to the financial system as a whole without costing the taxpayers any more. That’s Title One and Title Two of the Dodd-Frank Act, the most essential element of the Dodd-Frank Act that would allow us to do that without so much disruption.
“One area where I’m a bit concerned is that there have been some efforts in Congress to repeal that resolution process and particularly the emergency process where government could intervene and avoid the ordinary bankruptcy process. I think that it would be a big mistake, we saw what happened when Lehman failed, there was no real structure or framework for doing that in a safe way,” he said.
Looking further afield, Bernanke said that, although China is likely to remain stable, the economic fortunes of this country will have a significant impact on emerging markets and the global economy.
“Despite the fact that they’ve built up their outstanding credit by a lot, they’ve had this big credit boom and house prices and other asset prices have boomed. The good news is probably that the risk of this collapsing into a so called ‘hard landing’ is pretty low – that’s because the government has a lot of control, a lot of fiscal space, a lot of capacity to spend and borrow if it has to in order to support the economy, and the debt that they have is mostly in their own currency,” he said.
Bernanke continued: “The slightly more negative – depending on how you look at it – is that I think there’s a lot of reasons why growth will continue to slow from here. It’s come down from 10% to 6.5% and will probably continue to slow. That will happen because they’re trying to do very complex reforms that will move them away from an economy based on exports and heavy industry to one based on services and hi-tech, financial services, etc.
“That’s one reason why growth will slow, they’ll have to reduce the credit growth and that’s probably also going to slow growth and finally they can’t rely on a weak exchange rate and strong exports to drive their growth, they’re just too big for that, and moreover, politically it would be hard for them to push down their exchange rate, in fact if anything they’re trying to support their exchange rate at this point. So one would expect to see their growth rate decline somewhat over the next few years, but again, it seems it will be done in a fairly stable way,” he said.
Asked to respond to recent comments about bitcoin being “a fraud” from JP Morgan CEO, Jamie Dimon, Bernanke responded that the desire from government authorities to prevent unlawful behaviour represents a threat to bitcoin, and other similar cryptocurrencies.
“I would make a strong distinction between the technology and the cryptocurrencies. For the cryptocurrency, a lot depends on the governance and what the purpose is and so on,” he said, adding that some proponents of bitcoin claim that the purpose of this cryptocurrency is to evade regulation and government intervention.
“I don’t think that will succeed, The ability to stop money laundering or criminal transactions, as soon as that comes under threat [the government] will take whatever action they need to prevent that. Bitcoin hasn’t shown itself to be a real transaction currency, it’s mostly a speculative venture, and I think that a threat to it and other similar currencies is that it’s working against, rather than with, the regulators,” commented Bernanke.