Why We Need Another Global Financial Crisis

Most people learn quickly in life that mental anguish and fear of an event is usually far more problematic than the outcome itself. This hard and fast rule applies both to things that are in, and out, of our control.

In the context of markets today, the perilous situation Deutsche Bank finds itself in provides an interesting example.

As the German lender continues to negotiate with the US Department of Justice over a near-US$20 billion fine, observers have questioned whether the bank will follow in the footsteps of the now-defunct Lehman Brothers.

Lehman, as you might recall, was the highest profile victim of the financial crisis that engulfed the global economy in 2008.

Yet what reason, if any, do we have to believe that Deutsche faces the kind of future that befell Lehman?

Worryingly, there are many…not least of which is the fact that Deutsche is sitting on some €46 billion in derivatives. The bank may claim that this figure is less serious than it looks, but it’s been saying the same thing for a while now, even as its situation has deteriorated.

So even if Deutsche successfully manages to reduce the pending fine to a more palatable level, the bank’s prospects look lousy.

Regardless, whether Deutsche requires bail-ins or bail-outs, it’s hard to see how it can plod along without some kind of assistance for much longer.

In a worst case scenario, the magnitude of a major bank failure would cascade throughout the global financial system overnight. But just what would such a collapse entail?

It would inevitably have wider repercussions for the global economy than Lehman’s liquidation did (or ever could, for that matter).

For one, this is the largest bank in Europe’s biggest and most productive economy. It’s also the fourth largest European bank in terms of asset holdings.

Of more importance, however, is that the accumulation of debts and toxic assets in the financial system over the last eight years makes today’s situation far more combustible than 2008. (While not in Deutsche’s control, finer details have a habit of going unnoticed when the proverbial crap hits the fan.)

Deutsche, it just so happens, is a good a candidate as any to light the fuse that ignites a financial meltdown. Though, in an era of unmitigated fiscal and monetary interference, we admit this remains unlikely.

Yet regardless of whether Deutsche avoids the kind of fate that befell Lehman Brothers, a global crisis might be just what this world needs.

A tonic for insanity

If you’ve even loosely tracked the global economy over the last decade, you’ll be familiar with the sense of dread that has accompanied this period. Every day the news seems worse than the last.

To our dismay, there’s no escaping the horror show when both niche and mainstream media have sounded like broken records for nigh on 10 years.

This sense of forthcoming doom is a permanent fixture in the global economy. Where optimism is allowed to flourish, it’s tempered by a widespread, chronic loss of memory. Good times only exist as long as they last. When they subside, we lose sense of the fact that they were there at all.

But the ‘bad’ times are different. They persist for much longer, seemingly never out of the picture for too long. And they have a habit of grinding us down. When you’re incessantly reminded of approaching disaster that never seems to arrive, you develop a sense of perpetual worry. Over time, this burden becomes so heavy that you come to believe its arrival represents something akin to death itself.

And it is this very conditioning to fear financial ruin which makes us susceptible to the rhetoric of those who shout and pout that we must do everything in our power to prevent such crises.

A crisis to believe in

None of this is to downplay the seriousness of the present situation facing the world. On the contrary, the aim is to highlight the potential significance of this moment.

Every generation has a tendency to believe that it stands at the precipice of the End Times — a mythical concept borne from biblical scriptures.

Just what these End Times are meant to look like, though, no one’s really sure. We harken back to the Great Depression of the 1930s to give us some kind of reference from which to start piecing together a future of a modern-day depression. It tells us stories of severe unemployment and poverty. So we immediately imagine ourselves on the streets, scrapping for food and shelter.

When people talk of a future depression, they do so to elicit this kind of fearful response to it. Why? Because they know that fear of such an outcome, however unlikely, is enough to sway the masses to support its prevention. But not the proactive prevention that aims to address the source of the problems. Rather, it prompts popular backing for reactive prevention that is inevitably built on more debt and largesse.

In a roundabout way, this brings us back to Deutsche Bank.

We don’t need to ask whether a Deutsche collapse would lead to market turmoil. We know it would. And we don’t need to question the potential severity of it. Creditors and investors (and, let’s be honest, taxpayers) would be on a hiding to nothing. Beyond that, the outcome of such a collapse is harder to predict.

What we can say is that a financial collapse would, at the very least, act as a release valve of sorts for the mental torture we’ve endured and tolerated since the turn of the decade.

This torment is partly self-inflicted, and certain people are more prone to it than others. The fear of helplessness, of not having enough to provide for your family, of losing your home and other assets; these are all concerns that weigh heavily on people in uncertain times.

Yet a large part of this worry has been foisted on us. Not only by the media, which acts as the official mouthpiece for the gatekeepers, but by the gatekeepers themselves — the central banks, the commercial banks, and the governments that aid and abet them.

But we could adopt a different mindset in thinking about the next crisis. Instead of fearing its arrival, we could see it as an opportunity to rekindle our collective sanity, by resetting a sickly financial system. Admittedly, ‘they’, the bankers and their government spruikers, may not give us that opportunity anytime soon. But, eventually, reality catches up with everyone. We don’t live in exceptional times; where civilisation flourishes, financial ruin follows.

Yet as in the case of worrying about trivial matters — only to discover that the outcomes are usually far more benign than we had anticipated — the next financial shock might be better off arriving now than at some nebulous point in the future.

The 2008 crisis, for all the damage it wrought, didn’t bring about the end of the world. The only mistake of the GFC was that it wasn’t allowed to unfold unadulterated, tainted as it was by fiscal and monetary policy.

Moreover, the argument that it would’ve been a lot worse had government not intervened is little more than speculation. Remember, it was the banks that convinced policymakers to act quickly. The very same banks that were responsible for creating the mess in the first place.

While it might be tempting to hope that a crisis is years (and not months) away, we are doing more damage in the long run; not just to the global economy, but to our own collective sanity and wellbeing.

Were we to fast-track the next crisis, the potential pain we’d experience could, in fact, be a tonic to the endless anxiety and uncertainty afflicting the global economy at present.

So here’s one toast to the (regrettably unlikely) collapse of Deutsche Bank.

Mat Spasic,

Contributor, Markets and Money

PS: The potential collapse of Deutsche Bank could be the catalyst that ignites the next great crisis of our time.

Yet according to Markets and Money’s Vern Gowdie, we’re already in the throes of this crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that will make the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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