The financial crisis is over – or so the Bank of England reckons. The Financial Policy Committee’s latest Financial Stability Report noted (with some understatement) that while there was “a period of heightened risk aversion and retrenchment from risk-taking as financial institutions, businesses and households sought to repair their balance sheets” after the great financial crisis, “the system has now moved out of that period”. Our banks are back to being “resilient”; credit is available again; and all is well.
There is something in this. The UK’s banks have moved most of the way through their deleveraging cycle. They all scraped through their stress tests and kind Mark Carney won’t make them raise any more capital as a buffer against future disasters. But while the most acute bit of the crisis might be behind us in the UK (and in America, where interest rates might actually rise relatively soon), it is ludicrous to even think of suggesting that this crisis is anywhere near over: its consequences are still being felt in economies and markets everywhere.
Those in doubt need only look at two things this week. First, commodity prices: oil is still falling, iron ore has hit a seven-year low, and copper is at a six-year low. The flood of money from quantitative easing (QE) and low interest rates has created an incentive for oversupply and hit prices along the way (see our cover story for details on how this “capital cycle” works). This cycle isn’t anywhere near over: US oil inventories are still rising, and this week Australia’s richest woman, Gina Reinhart, made her first iron-ore shipment from her new mine. In a world of low returns, low prices aren’t deterring her.
The second thing to look at is demand for the new Bugatti Chiron – which, says Wolfgang Dürheimer, Bugatti’s president, is to be the world’s “most powerful, fastest, most luxurious and most exclusive production super sports car”. It costs $2.5m. You might think that’s nuts. Other people don’t – VW has taken 100 orders, sight unseen. What’s that got to do with the financial crisis?
I suspect it is at least in part a symptom of the search for a store of value in a super-low yield and very uncertain world. The same thing has driven prime property prices, high-level art prices, stamp prices, classic car prices and the prices of anything investors consider to be in short or limited supply to stunningly high levels. It’s all part of what Max King of Investec calls the “slow poison” of QE and aggressively low interest rates – low rates that are still with us because no developed economies seem able to find a path to growth that doesn’t involve devaluing their currencies.
The banks might not seem as likely to go bust as they once were. That’s nice. But the consequences of their near miss – and the interventions from central banks to save them – are only just beginning to play out. It isn’t over yet.