The Deutsche Moment : Why Uncertainty Around Deutsche Bank Marks the End of the 2008 Crisis?
Most experts compare the current situation of Deutsche Bank to that of Lehman Brothers in 2008. They emphasize the similarities and argue that 2008 is back. I will argue that the current situation is the iconic milestone of the clear END of the 2008 crisis. Here is my argument:
What was the Lehman Crisis about? In September 2008, we were facing an under-regulated banking sector and fears of rising interest rates (due to presumed inflation generated by USD 140 oil prices).
What is the current Deutsche Moment about? In September 2016, we are facing an over-regulated banking sector (the US Department of Justice throwing an USD 14bn fine at Deutsche Bank) and fears of never rising quasi-zero (in Germany even negative) interest rates.
It is apparent that during the 8 years between the Lehman Crisis and the Deutsche Moment the nature and the source of banking instability have turned 180 degrees. Therefore, in my eyes, the Deutsche Moment is the true hallmark of THE END OF THE 2008 CRISIS. This is the moment, when the world is realizing: too much regulation and too heavy punishments are counter-productive (Deutsche immediately rebound from an under USD 10 share price to a near USD 14 share price when the DOJ reduced its presumable fine to USD 4.5bn) and a permanent 0 rate environment is unsustainable (it erodes the profitability of banks to an extent where their liquidity and capital positions are hurt, thereby causing global financial damages).
There are two key questions looking ahead:
(1) What will happen to the current 0 rate environment?
(2) What will happen to the over-regulation of banks?
1. Rates Going Back to Normal: Historic average nominal effective interest rates in the United States are around 4.5 to 5.5 percent. The situation we are in since December 2008 is absolutely unique and uncommon in global monetary history (as well as in US monetary history). Permanent 0 rates are destructive, unsustainable and unnecessary in many ways: it encourages financial engineering (such as share-buybacks) over real capital investments; it encourages bubbles in asset prices (a great example is the real estate market); it goes against the Taylor Rule (the monetary rule defining ideal nominal interest rates in relation to growth and inflation); it keeps the currency permanently weak which releases pressure from productivity (we see that productivity-growth was way below average since 2008 in the United States); stock markets and household net-worth are in historic heights; unemployment is between 4.8 and 4.9 percent which is considered as de facto full employment; CPI is over (or at) 2.0 percent (which is the target of the Fed).
As Alan Greenspan very smarty and clearly articulated recently on Bloomberg: “I cannot perceive that we can maintain these levels of interest rates for very much longer, they have to start to move up and when they do they could move up and surprise us with the degree of rapidity which may occur.”
Why does Greenspan talk about the surprising rapidity of rate-hikes? Because he is well aware of the forgotten rule of monetary economics, described by John Maynard Keynes as the ‘Liquidity Trap’. The ‘Liquidity Trap’ occurs when rates are permanently zero. In this case the rise of the monetary base (i.e. new money printed, QE) does not precipitate in inflation. It is like a car’s gear shift: the lower gear you are in, the higher acceleration (growth of prices i.e. inflation) you can expect. Except for being in gear zero (a zero rate environment, i.e. in ‘neutral’ gear), when the acceleration is basically zero and your car is standing still. This is the same with monetary policy and inflation: lower rates take your economy to higher inflation, except for permanent 0 rates, which take your economy to neutralizing (i.e. putting into a trap -> the ‘Liquidity Trap’) the additional liquidity (i.e. the marginal monetary base created by QE). But once you put your car into gear, you will experience exponential acceleration and to tame your car and reduce acceleration you will have to keep changing the gears upwards (raise rates).
2. Regulatory Environment Easing Up: Banks are utterly over-regulated and this is the result of a world-wide series of overreactions from politicians and regulators. The Deutsche story is iconic, because this bank was incidentally pushed down by the DOJ fine, yet continuously hurt by having to terminate overregulated business lines in the last five years. Politicians and regulators will realize: now the tide has turned and as opposed to 2008 now systemic risk is coming from OVER-regulation, not from any sort of laissez-faire UNDER-regulation.
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8 年The analogy of car gears to explaun liquidity trap is perfect. But causation of 0 rate to share buy back is farfetched. To me there is no association or disassociation between 2008 FC and 2016 DB moment. It just happens that one can notice less regulation in former and more (or perhaps new normal) in the later. Simillarly interest rate movement can be seen indepedently of the two crisis. It is true that 2008 FC had tailwinds due to rising interest rates but 0 interest rates now are neither headwinds or tailwinds to the DB moment
Economist, Banking Operations Specialist Consultant and Trainer. Instructor at Illumeo.
8 年Interesting article. Under-regulation got us into this mess in the first place by scrapping restrictions on banks’ “own account” trading activities. Re-regulation has been an attempt to correct this. The new “regulatory” trend since 2008 has become massive fines, which are in effect a new form of arbitrary taxation. Once upon a time a fine imposed on a bank for a transgression was a serious mark of shame which could ruin that bank. No longer. Banks for their part wield too much political, and hence regulatory influence – they need to be split into much smaller units.
ETH Zurich Foundation, Executive and Trustee - Corporates, Foundations and Social Enterprises, Science and Philanthropy
8 年In 2008 a lack of values and concern for the public consequences of own actions backfired against banks. In 2016 DB is accused of having by-passed financial sanctions against Russia and enabled illegal laundry of billions of dollars. In 2016 Wells Fargo is accused of... and so on. Where exactly did we miss the change between 2008 and 16?
Enterprise Data Architect
8 年Over 40 trillion notional in derivatives, the majority being OTC FX. Presumably if DB pay the 14Bn fine they cannot cover additional margin calls? No, not the end and not necessarily the fault of regulation either.
Director of Research, Lantern Insights. Sustainability thought leadership and research services. Nature, Climate, Carbon, Technology, Finance, Strategy, Policy, Data Insights.
8 年I'm not sure the settlement with the DoJ is any more than a rumour based on press release from AFP. I suspect we usually have the wrong regulations, that most are targeting past symptoms rather than present risks and that governments lack the will to enforce existing regulations on their banks (although foreign ones appear to be fair game) whilst flooding the market with free money and partially owning nationalised banks. The moral hazard associated with bailing out the banks that were considered too big to fail remains and I don't see any regulations that touch this fundamental gaming of the entire economic system by insiders.