EDITOR'S LETTERMerryn Somerset Webb
The crisis is far from over
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, copper is at a six-year low, because 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?
• Read the full editor’s letter here: The crisis is far from over