Are we on the verge of another financial crisis?
At a screening of a new documentary looking at economics called ‘Boom Bust Boom’ Professor David Taylor from the African Institute of Financial Markets and Risk Management (AIFMRM) in the commerce faculty at the University of Cape Town (UCT), said: “It is not a question of whether there will be another financial crisis like we saw in 2008 following the US sub-prime mortgage debacle. The question is when and where.”
Possible causes of the next crisis
Professor Theo Kocken, a Dutch activist and co-producer and writer of Boom Bust Boom, noted: “Whenever you hear someone say an economy is strong and robust, a red light should be going off. Stability leads to instability, we know this now.”
Dr. Co-Pierre Georg, a senior lecturer at the AIFMRM in the commerce faculty at UCT, noted that there are a few possible causes to the next financial crisis.
“Following a spectacular boom, the Chinese stock market shows signs of massive distress. China has raised a number of red flags lately, in particular their interbank market experienced stress about a year ago, which already raised concerns about the safety of the Chinese financial system. Another possible source for the next crisis is the use of highly complex software in financial markets. Wednesday's emergency shutdown of the NYSE (New York Stock Exchange) has highlighted that,” revealed Georg.
Taylor agreed that financial instability in China could be the cause of a future financial crisis, as it has experienced a slowdown in the high growth it has experienced in past years.
“People are always talking about booming growth, but there is not enough talk about what level growth is sustainable or even real. Very rapid growth often indicates euphoria and increases the risk of a consequential crash. Should a financial crisis occur in China, it would seriously affect South Africans,” said Taylor.
The current financial situation in Greece could lead to a global crisis too. Georg said: “The Greek crisis caused a lot of uncertainty, in particular about the future of the Eurozone. Greece itself is a very small player in the world economy, so the direct effects are small. However, investors are sensitive to uncertainty and the Greek crisis could trigger a risk-on risk-off market. In such a market, investors become extremely sensitive to risk and move out of risky asset classes, including emerging market sovereign debt.”
However, there are ways for investors to prepare and protect themselves from the impact of a financial crisis. “The best way to protect yourself is by understanding that high return implies high risk. If you want to be cautious in your investments, choose products with low interest rates. A good guiding principle is that relatively safe investments pay a return slightly higher than the rate of inflation.”
Kocken highlighted: “Financial crises affect all life on our planet. All financial crashes are essentially the same. People believe they are wiser or that circumstances are different to prior times, but in essence, it is all about human nature. We tend to forget the previous catastrophe and think it won’t happen again. But it will. And the next one could be worse.”
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