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- The Big Threats to the Financial System: Unveiling Fractured Markets in the Era of Rising Interest Rates | FT Film
The Big Threats to the Financial System: Unveiling Fractured Markets in the Era of Rising Interest Rates | FT Film
Discover the looming dangers to the financial system as investors face the end of cheap money and the emergence of inflation. Delve into the impact of rising interest rates and the cracks appearing in the financial system due to a decade of easy monetary policy.
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Video Transcript
This is a story of a world that became addicted to low interest rates.
It's a tale of what can happen when the era of cheap money comes to an end.
Investors have just been spoiled for like two decades by super low interest rates and
it's over.
The game is up.
Inflation is here for the first time in most investors' living memories.
And this changes everything.
30 years of falling bond yields perhaps coming to an end.
Suddenly we're at an inflection point.
We're seeing some cracks in the financial system.
What a decade of easy monetary policy did
was encourage people to take greater risks.
You see rates rise as quickly as they have.
and there are things that break.
At no time have we seen such a complicated constellation of risks.
It's only when the tide goes out that you see who's been swimming naked.
So let's rewind to 2008.
You have this huge global financial crisis.
That was due to leverage, too much borrowing, particularly in the US mortgage market.
The result of that was the need for incredible liquidity injections into the financial system.
In the immediate aftermath of the global financial crisis, central banks really had to sit on
their hands. Economies globally were so lackluster and the recovery was so slow. And central
banks weren't grappling with high inflation, they were grappling with what to do with incredibly
low inflation.
Central banks around the world respond to the recession that follows by slashing interest
rates by buying up vast quantities of government debt under their quantitative easing programs.
This was a new thing, really.
We saw central banks buying back huge amounts of government bond markets, trillions and
trillions of dollars worth of government IOUs ended up being owned by central banks instead
of by traditional investors.
And that did set forth a paradigm, if you will, of inexpensive money and a feeling that
there was a Fed put below the markets.
Federal Reserve and central banks globally were able to achieve this because there was no inflation.
Financial markets in particular get conditioned to this world where every time something goes wrong,
a central bank comes riding to the rescue.
Ever since that point, we've had loose monetary policy with interest rates heading all the way down to zero.
If you went back to a couple of years ago, most of the government bond markets of the world
had negative yielding government bonds, which is just extraordinary.
Now, that existed up until the pandemic hit,
and then you had central banks and governments
step in pretty aggressively to support the economy
while we put the economy into a deep freeze.
The global financial crisis,
followed by a Eurozone crisis,
followed by COVID,
three big things coming in rapid succession.
In a way, we've almost forgotten what normal looks like.
There is everything that leads up to COVID
and the invasion of Ukraine,
and there is everything after.
