Ten years on, dodgy debt continues to threaten global chaos

In early September 2017, ten years after the collapse of UK bank Northern Rock, TJN will be publishing a special edition of Tax Justice Focus, guest edited by Professor Daniel Mügge (University of Amsterdam) which draws on fresh research from the EU-funded Enlighten programme.  In this article Professor Mugge argues that faced with intractable problems of rising debt, and the obvious limitations to what financial regulators can achieve in the face of a hugely oversized financial sector, debt forgiveness must be added to the policy list if we are to avoid chaos in the global economy. 

In his Open Democracy article Mügge outlines why the current situation is eerily reminiscent of the crisis situation that led to the near-collapse of the global economy in 2008:

Ten years ago, on 2 April 2007, the US subprime mortgage lender New Century filed for bankruptcy in a Delaware court. It was an obscure first domino to fall. But one and a half years later, Lehman Brothers was insolvent, and global finance on the brink of meltdown.

Whole bookshelves have been filled with the analysis of the crisis that followed. In essence, too much bad debt had accumulated in the system; on top of that, an impenetrable layer of derivatives had supercharged financial risks; and public regulators had been asleep at the wheel.

You would think that, armed with those lessons, we would have vanquished system instability. But in its Global Financial Stability Report last fall, the International Monetary Fund warned that medium-term risks were rising once again. Market sensitivity – essentially, anxiety among traders – breached levels we hadn’t seen since 2009.  Deutsche Bank’s wobbles last autumn were eerily reminiscent of the hot crisis years. Why is financial fragility still with us a decade after it burst into the open?

Read the full Mügge article here.