fb-pixel Skip to main content
Opinion | Niall Ferguson

Financial panic or slow burn?

The floor of the New York Stock Exchange on Feb. 1, 2016.Richard Drew/AP

In the best-known scene of “The Revenant,’’ Leonardo DiCaprio is hideously mauled by a bear. The world’s investors now know exactly how that feels.

As I write, nearly every major equity index is down since the beginning of the year, with Italy as the worst performer (-23 percent) and Canada the best (-5 percent). The S&P500 is down 9 percent. With the exceptions of precious metals and safe haven sovereign bonds, it has been a rout.

The question now being asked on all sides is whether we are in for a repeat of the great crisis of 2008.

One reason to be fearful is that big banks have been especially hard hit. They were, of course, the key transmission mechanism in 2008, when their exposure to securities linked to US sub-prime mortgages was the fatal fault-line in the global economy.


Two theories have been advanced to explain this latest wave of banking distress: worries related to new regulation, which has intentionally placed new burdens on banks, and exposure to the energy sector in the United States, where bankrupticies are expected to spike this year.

Yet these are not sufficient explanations. Rather, the current reassessment of financial risk reflects deeper shifts at work throughout the global economy — some a legacy of the 2008 financial crisis, and some stemming from the slump of commodity prices since 2011.

The financial crisis of 2008 did not become a Great Depression for two reasons. First, central banks led by the US Federal Reserve adopted a series of expedients, notably zero interest rates and large-scale asset purchases (often called “quantitative easing”). Second, massive Chinese credit expansion and investment boosted growth not just for China but for all countries exporting commodities to China.

The Chinese source of stimulus began to diminish in 2011 as the People’s Bank of China steadily tightened monetary policy. This was the turning point for global commodities, which had bounced back from the financial crisis thanks to Chinese demand.


The end of the commodity “super-cycle” initially affected those countries that were heavily reliant on commodity exports. It did not appear to pose a serious threat to developed economies; indeed, for major importers like Japan and most European countries, cheaper oil and other commodities looked like providing an additional boost to demand.

The crucial change for developed economies was the gradual realization that central banks’ so-called “unconventional monetary policies” were either coming to an end (in the case of the United States) or were losing their efficacy (in the case of Japan).

With the resort of increasing numbers of central banks to negative interest rates, doubt has crept in. Could a measure that for years had been dismissed as technically infeasible actually work? And might it have unintended consequences?

The critical question is whether or not there will now be a feedback effect, whereby financial gloom further damages growth. In the crisis of 2008 there was unquestionably such a “doom loop,” as fears of bank insolvency froze international trade, which in turn caused a collapse in output and investment. I doubt that this will the case this year.

True, US oil producers have lost a lot of money and are in the grip of a severe credit crunch. But the US labor market looks relatively strong, as Fed Chair Janet Yellen noted last week. True, consumers seem to be spending rather than saving their cheap energy windfall. But their confidence is wobbling rather than collapsing as it did in 2007 (long before Lehman Brothers blew up).


To hurt the “real” economy, the losses of energy companies would need to have a ripple effect comparable with the losses of investors in subprime mortgages back in 2008. That seems unlikely.

Finally, if things get really ugly, the Federal Reserve is free to perform a U-turn by cutting rates and doing additional quantitative easing.

The economic actors that have suffered the most substantial wealth losses in the past year are of course the governments most reliant on oil sales for their revenues. This brings to mind not 2008 but the period 1986-1998, a period characterized by low oil prices as well as by a famous episode of stock market volatility.

The October 1987 stock market crash gave investors double the mauling they have suffered this year. Yet in macroeconomic terms nothing happened. The real action was elsewhere. With oil prices in the doldrums, the last support of the ailing Soviet economy was removed. By the end of 1991 the USSR no longer existed.

Today, the US economic outlook is tolerably good. The things to watch are China’s currency, which some say teeters on the brink of a big depreciation, and the slow burn of cheap oil. As in the 1980s and 1990s, its political consequences could be far more spectacular than the financial fireworks of the past six weeks.


Niall Ferguson is Laurence A Tisch professor of history at Harvard and a senior fellow of the Hoover Institution at Stanford.