We have been reading numerous comments recently about a forthcoming recession and the next crisis, particularly on the tenth anniversary of the collapse of Lehman Brothers. The question is not whether there will be a crisis, but when. In the past fifty years, we have seen more than eight global crises and many more local ones, so the likelihood of another one is quite high. Not just because of the years passed since the 2007 crisis, but because the factors that drive a global crisis are all lining up.
What drives a financial crisis? Three factors.
- Demand-side policies that lead investors and citizens to believe that there is no risk. Complacency and excess risk-taking cannot happen without the existence of a widespread belief that there is some safety net, a government or central bank cushion that will support risky assets. Terms like “search for yield” and “financial repression” come precisely from artificial demand signals created from monetary and political forces.
- Excessive risk-taking in assets that are perceived as risk-free or bullet-proof. It is impossible to build a bubble on an asset where investors and companies see an extraordinary risk. It must happen under the belief that there is no risk attached to rising valuations because “this time is different”, “fundamentals have changed” or “there is a new paradigm”, sentences we have all hears more times than we should in the past years.
- The realization that this time is not different. Bubbles do not burst because of one catalyst, as we are told to believe. The 2007-2008 did not start because of Lehman, it was just a symptom of a much wider problem that had started to burst in small doses months before. Excess leverage to a growth cycle that fails to materialize as the consensus expected.
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