As the 2008 financial crisis gets further in the rearview mirror, what’s the next threat to the global economy?
That question was the subject of the presentation by Hyun Song Shin, the relatively new head economist for the Bank of International Settlements (the “central bank of central banks”), at the Brookings Institution on Thursday. You can listen to the full audio of the speech here.
Shin laid out a couple of different global trends that the BIS is looking at. The two big things were 1) the boom in lending that occurs via debt issued on the bond market versus conventional loans from banks, and 2) the effect fluctuations in the dollar have on the global economy.
From Banks To Bond Markets
There are two issues that he’s looking at: first, the fact that so much of the credit growth in the economy is coming from capital markets, not necessarily from traditional bank lending (in particular there was a lot of talk about large asset managers buying up corporate bonds). That’s a shift from pre-2008 crisis. The common wisdom is that asset managers are benign in the global economy. But Shin doesn’t think that’s true anymore.
The question is how and if that affects the real economy if there’s a big shock to the financial system. On the one hand, he said, large asset managers aren’t as leveraged as banks. On the other hand, clients of asset managers are things like pension funds. A huge credit crunch that hits asset managers hard would be bad news for the retirement accounts of a lot of Americans.
The second issue is how dollar-denominated debt ripples through the global economy.
Dollar-denominated credit to non-US borrowers has skyrocketed over the last decade or so (even more so from outside of the US than domestic lenders). When financial institutions outside the US are dealing with both debt in dollars and debt in local currency, fluctuations in the exchange rate have a big impact.
When the dollar appreciates, on the other hand, things get tight for institutions lending in local currency. Shin thinks this may be behind recent global economic crises: Latin America in the 1980s and Asia in the 1990s.
On top of that, there’s a trend of buying corporate bonds with longer and longer maturities (the average is now about 12 years), says Shin, which makes them more sensitive to yield changes.
Once again, everything’s fine now, but Shin thinks there’s real risk here if there’s a big disruption in the dollar market.