Five-years on, the credit crisis has mutated into a “dangerous new form”, expert warns

Posted by er134 at Sep 13, 2013 04:29 PM |
Five-year anniversary of Lehman bankruptcy Sunday September 15

Issued by University of Leicester Press Office on 13 September 2013

The credit crisis has mutated into a “new, highly uncertain and potentially deadly form”, five years after the collapse of Lehman began the global credit squeeze, an expert on the crisis has warned.

Professor Mark Stein, Chair in Leadership and Management at the School of Management at the University of Leicester, says the changing nature of the crisis could increase the risk of a financial collapse, by confusing policymakers and financial markets.

The focal points of the original crisis were large financial organisations in the USA, but it is now centred on the political systems of the eurozone.

The collapse of several major financial institutions in 2008 sent financial markets into a tailspin, because of the uncertainty which their crash created.

Professor Stein, who has won an award for his research into the causes of the crisis five years ago, said: “The key issue of the current crisis - the possibility that countries will exit the eurozone - could hit financial markets equally badly because it is equally unprecedented.

“There is, therefore, again huge uncertainty. No one knows the true value of countries’ new currencies if they leave the eurozone, or how much exposure banks around the world would have to exiting countries.”

Solving the eurozone crisis - creating enough financial stability to eliminate the risk of countries having to leave - is extremely difficult because the eurozone is made up of diverse countries with “distinct cultures, allegiances, economies, and fiscal and banking systems”, says Professor Stein. This makes it hard to secure agreement on solutions.

Agreement is also harder because the Mediterranean countries at greatest risk of having to leave have troubled political systems.  They have seen widespread and burgeoning left-wing protests, an alarming increase in support for extreme far-right parties, and deep despair about poverty and unemployment. Antagonism towards Brussels is growing. The anger is increasingly felt towards Germany, the paymaster of the bailouts and the country driving the austerity policy. This has re-kindled old animosities dating back to the Second World War.

The uncertainty is exacerbated by the absence of an exit clause in the 1993 Maastricht treaty, the 1993 agreement that set the plan for a single European currency in stone. Mediterranean countries may have been pushed to the brink so that a euro-exit may seem the best option, but they are caught because the lack of an established exit mechanism means that any possible departure from the eurozone is likely to be chaotic.

“Until there is some resolution to the eurozone’s problems, the single currency area will remain at the centre of financial market instability”, says Professor Stein.

“President Roosevelt once said dismissively that the only thing we have to fear is fear itself”, he notes. “However, financial markets are governed by fear. Fear is created by uncertainty, and uncertainty is generated by the continuous change in the nature of the credit crisis.”

Ends

For more information, please contact:

Ather Mirza
Press Office
Division of Corporate Affairs and Planning
University of Leicester
tel: 0116 252 3335
email: pressoffice@le.ac.uk

Notes to Editors
Professor Stein won the 2012 iLab prize for innovative scholarship for his paper ‘A Culture of Mania: A Psychoanalytic View of the Incubation of the 2008 Credit Crisis’, published in Organization in 2011. The paper argues that the crisis was fostered by a manic collective culture in the banking world, characterized by four aspects: denial; omnipotence; triumphalism; and over-activity.

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