As we slowly come out of the last deep, systemic financial crisis of 2009, the global economy appears to be regaining its vitality and showing trends towards a new era of financial highs. However, the question remains: is this revitalization a sign that a long road of economic prosperity will characterize the future of global economics, or should we begin preparing for another inevitable financial crisis? From geopolitical conflict to the unpredictability of technology, there are many potential triggers that could lead to financial crises; but with the surprising resilience the recent economy has demonstrated, it is perhaps best to allow a bit of optimism—and caution—to guide our economic decision-making as we move forward.
There is a plethora of potential factors that could trigger the next financial crisis. While the future of the global economy appears promising, the complexity of political, social and technological factors that are in constant interplay with the global economy could lead to the next financial crisis—and most likely, it will happen somewhere where none of us are looking.
Newer financial institutions and individuals have not been through the rigor of traditional credit cycles. With a lack of any form of credit cycle over the past 10 years, newer businesses and institutions do not have the experience and know-how to weather financially difficult times like many established businesses do. Similarly, newer practices such as structured level, DTS and peer-to-peer lending have not gone through the tried and true processes that hundred-year-old banks have. With lack of experience by new practices and even newer financial players, it is difficult to predict how these institutions would react in the event of a significant downturn in the economy.
Increasing optimism about the global economy could be blinding us to obvious economic fumbles. With most financial crises triggered by seemingly obvious events—such as AAA securities or Eurozone credit in 2009—it is important to pinpoint potential problems early on in order to negate future financial crises. Focusing on debt levels, how much short entrance there is in volatility and other potential financial factors, for example, is crucial to the financial success of the global economy.
There are exogenous factors that could bring about a financial crisis. From mass government debt to geopolitical issues to unanticipated events such as pandemics and weather catastrophes, the global economy is influenced by many exogenous factors that could quickly lead us towards a new and devastating financial crisis. Similarly, economic issues such as sudden inflation or stock price collapses could also show warning signs of an impending financial crisis.
Nearly every business relies heavily on technology to operate. With businesses big and small around the world relying heavily on the Internet and the Cloud to become increasingly interconnected and efficient, any system-wide failures of these platforms could prove catastrophic for business.
Regulators are all looking at the same things. If all financial institutions, such as insurance companies and banks, are regulated by the same rules and put through the same stress tests, there could be other factors being unaccounted for that could be affecting the economy in a negative way—and nobody to watch for these factors.
There are many practices being put into place to avoid the next financial crisis. From governments to the economy, new, more effective practices and regulations are being put into place to not only prevent the next financial crisis from occurring, but to also promote an even more robust global economy.
Banks are going back to basics to regain their unique competitive advantages. While 10-15 years ago banks were seeking to execute against similar plans and become institutions that could provide everything to everybody in an effort to create a financial super market, recent financial crises and trends have brought about a shift in banking models to return to their basics and focus more on areas where they have a competitive advantage. In this way, banks are scaling through slow but constant growth and becoming much more resilient.
Governments have the ability to contain small financial crises before they spread. In China, for example, the Chinese government employs a system where in the case an individual institution or smaller market begins experiencing problems, the government will quickly move in to contain the risk in order to ensure that whatever panic is caused by the institution does not spread to a wider level. Then, larger, healthier organizations in partnership with the Chinese government can assist the institution in crisis.
Collaboration between regulators, academics and private equity investment firms is key. While 15 years ago banks would meet with federal institutions only once every quarter, today’s banks have seen a shift where federal regulators are present within many large banks on a near daily basis. With regular stress tests and more ability to try and course-correct the economy in real time through the partnership between these institutions, the economy has the ability to alleviate many problems before they spur out of control.
Technology is a major enabler in the global economy. While technology presents many risks to the global economy, it also provides a vast amount of opportunity for businesses and individuals alike. From inclusivity provided by near universal access to the Internet to other disruptive and life-enhancing technologies such as AI and the Internet of Things, businesses now not only have means by which to become more efficient, but also more time to be spent on innovation and growth.
Finance ultimately democratizes economic growth. While various financial crises have threatened to disable the global economy, overall, the global economy has grown beyond expectations over the past century. And while it is important to learn from past mistakes and remain cautious moving forward, the democratization of economic growth and innovation will continue to lead individuals around the world to new levels of prosperity and wellbeing.