Famed fund manager Mark Mobius, one of the pioneers of emerging-market investing and a staunch advocate for the frontier markets, has made some noise with a simple statement of fact: Another financial crisis on a global scale is unavoidable, because policy makers haven’t resolved the regulatory and other problems that led to the first one in 2008.
“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mr. Mobius told a lunch gathering of foreign journalists in Tokyo, some of whom were apparently sober enough to take notes. The main culprit will again be derivatives, whose effective regulation has been repeatedly stymied by the major financial houses. They make a heck of a lot more money designing and peddling these financial tools when the clients can’t quite figure out their true market value or the risks they entail.
Before the U.S. housing bubble burst and all those mortgage-backed securities turned to dust, securitized debt and derivatives accounted for roughly 79 per cent of global liquidity and amounted to between five and six times global GDP. In dollar terms, derivatives totalled $300-trillion (U.S.) to $400-trillion before the crisis. Since then, as Mr. Mobius pointed out, derivatives have grown in size, to the point where they are now about 10 times world GDP.
As derivatives expert Satyajit Das has warned, if a big bank or a bunch of big banks that are interlinked through derivatives run into serious trouble again, we’ll be staring at another Lehman disaster. “Derivatives will play their traditional part, which is communicating the risk at the speed of light. And in the period of history that we have just gone through, nobody has corrected anything. So we don’t have any more circuit-breakers than we did then.”
Making matters worse, as Mr. Mobius pointed out, the surviving too-big-to-fail banks are bigger than before the crisis. As that noted financial commentator Mark Twain once observed: “It is not worth while to try to keep history from repeating itself, for man's character will always make the preventing of the repetitions impossible.”