Will the recent economic crises, i.e. the 2020 pandemic economic crisis and the 2022 energy crisis, soon be followed by a financial crisis in the banking sector and/or a debt crisis in the public finances of states?
When, in March 2020, following the WHO's declaration of a global epidemic or pandemic, there was a panic sell-off of investment assets on the capital markets and the risk of a deep, double-digit recession of the economy emerged, central banks cut interest rates and the governments of some countries launched financial assistance programmes on a record scale, consisting of non-refundable financial subsidies for commercially operating companies and enterprises in various sectors of the economy, refinancing of fixed costs of economic activity, deferral of payments of contributions to the social security system, tax reductions, etc., the state's financial resources for these large assistance programmes will be used to finance the crisis. The state drew its financial resources for these large financial aid programmes from additional issues of treasury bonds, which were purchased by commercial banks, investment banks, enterprises, citizens and in some countries, such as Poland, mainly by the central bank. Additional, huge amounts of money introduced into the economy without being covered by manufactured products and services, as predicted in mid-2020, generated a strong increase in inflation on the basis of an increase in the prices of raw materials, products and services, which began almost at the beginning of 2021. Additional large amounts of money without coverage in economic goods in some countries such as Poland were introduced into the economy outside the budget, i.e. by transferring this additional money to special purpose funds created for this purpose functioning in institutional government agencies bypassing the state budget. These institutions distributed this money in the form of mainly non-refundable subsidies to companies and enterprises, some of which did not function because they were temporarily in lockdowns introduced by the government. During the 2020 pandemic economic crisis, therefore, interventionist, historically large bailout programmes based on so-called Crisis Shields were applied, and in some countries mainly on the basis of issuing and selling to commercial banks, companies and citizens additional Treasury bond issues. Many banks purchased these treasury bonds in large quantities when, prior to the pandemic, inflation and interest rates were much lower than in the 2021 - 2023 period. During the 2020 pandemic, central banks further reduced interest rates to interventionist low levels. Some commercial and investment banks, with the economic downturn and recession deepening during the pandemic, bought government bonds treating these instruments as safe assets during the economic crisis and as they reduced the scale of their lending and/or investments in securities generating higher levels of investment and credit risk such as shares issued by listed companies due to the recession of the economy. However, when central banks started a cycle of interest rate increases from 2021 and 2022 onwards, then the prices of previously issued government bonds with lower interest rates on stock exchanges began to fall, as these securities lost their previous attractiveness. At that point, rating agencies began to downgrade the ratings of banks that had previously purchased large volumes of previously issued sovereign bonds with significantly lower interest rates, in view of the average market interest rate levels already prevailing from 2022 onwards, then the problem was recognised. This problem was the potential insolvency and large financial losses of these banks. However, when analysed on a macroeconomic level, the problem is now much broader. Well, public debts have increased strongly in many countries after the pandemic economic crisis of 2020. The increase in inflation already predicted from mid-2020, which started to materialise from 2021, caused central banks to raise interest rates. On the one hand, some investment banks like Silicon Valey Bank and Signature Bank, which had invested a large part of their funds in government bonds just before the cornovirus pandemic at several times lower oproc. levels for these financial instruments, generated large financial losses and collapsed. On the other hand, thanks to high inflation, the real value of public debt in many countries is falling.
In view of the above, I address the following question to the esteemed community of scientists and researchers:
Following the recent economic crises, i.e. the 2020 pandemic economic crisis and the 2022 energy crisis, will there soon be a financial crisis in the banking sector and/or a debt crisis in the public finances of countries?
What do you think about this topic?
What is your opinion on this subject?
Please respond,
I invite you all to discuss,
Thank you very much,
Warm regards,
Dariusz Prokopowicz
Contributing factors to the deepening financial and public debt crisis include systemic failures, uncontrollable human behavior, incentives to take too much risk, regulatory absence or failures, or contagions that amount to a virus-like spread of problems from one institution or country to the next, regionally or globally. Even when measures are taken to avert a financial crisis, they can still happen, accelerate, or deepen. Such a crisis is always the result of a sequence of events, each with its own trigger and culminating in the collapse of the banking system; asset prices drop steeply, businesses and consumers cannot pay their debts, and financial institutions experience liquidity shortages.
Financial crises are not uncommon; they have happened for as long as the world has had currency; with respect to events in economic and monetary history, dear Dariusz Prokopowicz , imo, there will be soon a serious financial crisis in the banking sector and a debt crisis in the public finances of countries. However, I do hope that we can somehow muddle through with a near-collapse by the application of economic macro-prudence.
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There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from the commercial banks, it means credit expansion and inflation.
No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.
An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole doctrine of interventionism collapses when this fountain is drained off. The Santa Claus principle liquidates itself.
Lv Mises
Dear Prof. Prokopowicz!
You pointed to a very important topic to discuss. I agree with Mr. Stephen I. Ternyik. May I state that I focus on Europe as I am a resident of Finland:
1) Ian Shine (2023). Recession risks re-ignited by banking crisis, World Bank warns of 'lost decade' of growth, and other economy stories you need to read this week, 30 March 2023, the World Economic Forum, available at: https://www.weforum.org/agenda/2023/03/recession-risks-ignited-by-banking-crisis-top-economics-news/
2) Hübenbecker, U. Is nobody interested in the future of banks? a scoping literature review on the state of the debate. Manag Rev Q (2023). https://doi.org/10.1007/s11301-023-00334-8, Quote from Conclusions: "How assumptions shape future prospects has yet to be addressed in the literature on the future of banks" Open access: Article Is nobody interested in the future of banks? a scoping liter...
3) Robin Wigglesworth 2023. Europe is having a better banking crisis than the US (so far), The Financial Times, 23 March 2023, available at: https://www.ft.com/content/81e811d1-e45e-47f5-b70e-1a4638b43010
May I argue that the problem is that nobody knows how long the recent economic crisis will last. The war in Ukraine might escalate to a level where it could stimulate a continuous crisis in the banking sector in Europe. This could be the worst-case scenario.
Yours sincerely, Bulcsu Szekely
Stephen I. Ternyik
Is there a formula in economics that the amount of money flowing into a company or consumer is greater than or equal to the amount of money flowing out. In other words, the financial crisis is a very simple reason: money is equivalent to water, it is cut off. Is there such a formula in the book?
Stephen I. Ternyik
I always think the banks know the cause of the financial crisis, but they didn't do it. If banks carefully investigate the income of the lender and the depositors 'funds, predict the lender's future income, or the possibility of withdrawals, the possibility of a financial crisis should be much lower. That said, the key is whether banks can do this: predict the flow of money for lenders or depositors.
Because the financial crisis is mainly the "loss of blood" of the bank's funds, and while banks mainly manage the inflows and outflows of money, inflows are depositors' deposits and outflows are loans or investments. If we can accurately predict the inflows and outflows, won't there be no financial crisis? The reason is simple, but banks do not seriously investigate the inflow and outflow of currency flows, they do not go to the places where lenders and depositors actually work.
The following 2 papers give some answers to your query, dear Duan Xian Xiang
https://mpra.ub.uni-muenchen.de/54835/
https://mpra.ub.uni-muenchen.de/44850/
Both of my papers contain relevant formulae as per your query Duan Xian Xiang
This may also interest you:
http://www.humanthermodynamics.com/NLSS.pdf
``Crises" happen frequently to human societies. The problem for a society is to overcome one crisis before the next one happens. When this doesn't happen, the number present at any one time increases - this is what kills societies. We still have not recovered from the 2008 financial crisis and are facing a new set (many) created from our politics.
The Fed is raising interest rates to fight inflation - or so the story goes. Well, not for the surface reasons. But to overcome the view in lenders minds of the repudiation of debt that inflation causes. So, we are in a lull before the storm of many crises.
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