“Financial Crises Are Naturally Recurring and Inevitable – Here’s Why”

“If you were to consider all of the financial crises we’ve witnessed throughout our recent history–each with their own unique causes and contexts–one consistent feature emerges: they’re cyclical…

Act I: Lax oversight and loose banking regulations lead to economic fragilities.

Act II: Severe financial crisis ensues, followed by finger pointing, reform via regulations.

Act III: A widespread “forgetting” takes place as markets rise; a myopic view that leads to lax oversight and looser banking regulations (Act I).

The cycle repeats itself.

Right now, we’re transitioning out of the third act to the top of the cycle, as the conditions for lax oversight and looser banking regulations are slowly creeping up:

• Earlier this month, the Fed decided to forego raising the capital buffer required of banks above its current level of zero.
• The Fed has also begun relaxing its stress test standard for US banks (though they are retaining those standards for foreign institutions).
• And the Financial Stability Oversight Council recently removed Prudential, its last insurer, from the Too-Big-to-Fail (TBTF) list.

None of these actions can single-handedly or collectively land a killing blow to the global financial system.

But if anything, these actions reaffirm this cyclical narrative–that upon learning from our mistakes, we forget those lessons to repeat the mistakes from which we, predictably, can once again learn and forget…”

Financial Crises Are Naturally Recurring and Inevitable – Here’s Why

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