Looking back at the financial crisis

March 5: A dose of hindsight – and stress tests – as we look back on banks in the year 2008. Plus, Brazil’s inflation battle and China’s growth expectations


On Tuesday, with the NASDAQ at new dot-com heights, we went back in time to 2000. Today, we’re going back to 2008.

A slate of stress tests, transcripts, investigations and other wonk-y assessments are out today, on what happens when banks go bad (or at least don’t have a sufficient capital cushion) and central banks dawdle. Get ready to revisit the heady days of the financial crisis.

But before then, a look at the no-news-is-big-news from Canada: yesterday, the Bank of Canada left the interest rate unchanged at 0.75 per cent, noting that the economy appears to be clipping along as planned. We’ll also take a look at Brazil, where the central bank hiked the benchmark rate still higher as inflation skyrockets, while in China, officials lowered their expectations for growth.

This morning, the Bank of England announced their benchmark rate, leaving the rate at 0.5 per cent, where it has been since 2009. A meeting for the European Central Bank today is expected to announce when the first dose of quantitative easing will come.

The Bank of Canada stays the course. The benchmark rate stayed steady yesterday at 0.75 per cent. Speculation had been up and down the last few weeks, after a surprise rate cut from one per cent – where the rate had been for five years – surprised analysts. “Canadian economic growth in the fourth quarter of 2014 was consistent with the Bank’s expectations,” the BoC noted in a release, adding that conditions have “eased materially” since January, and non-energy exports and investment are helping to fill the gap left by the oil rout. But then again, it simply might be too early to tell how bad the damage is: the Bank also noted that the full impact of the lower oil might not be felt until halfway through the year, opening up another can of speculation for whether a cut could be in the offing at the next meeting.

China lowers their expectations. Chinese officials said it’s time to accept a “new normal,” lowering expectations for growth this year to “around seven per cent” during a meeting of the Communist Party’s plenary session. Last year China grew 7.4 per cent, to expectations of 7.5 per cent growth, the lowest since the fallout of Tiananmen Square in 1990, and manufacturing and inflation numbers have repeatedly showed signs of a general slowdown of the country’s economy. It’s been a steep drop: while the two years before 2014 saw around 7.7 per cent growth, the three decades previous had average rates of growth over 10 per cent. The meeting also produced targets on job creation, foreign direct investment and CO2 reduction.

Prices are skyrocketing in Brazil. With so much talk of the threat of deflation in the eurozone and slowing price rises at home, we risk overlooking the major economies having the opposite problem. In Brazil, the central bank yesterday hiked the benchmark rate to 12.75 per cent – a full 12 per cent above Canada’s – attempting to halt high inflation even at the risk of a recession. Annual inflation is currently 7.36 percent, with prices rising by 1.33 per cent in January alone – since the last central bank meeting in January, the real has slid in value by 12.7 per cent. There are plenty of other problems: last year, S&P lowered the country’s credit rating to one notch above junk, and the government has since been trying desperately to keep the rating from sinking lower. The budget released last month did post a surplus, but came below estimates – and excluded payments for interest, cities/regions, and state-owned companies. In the meantime, Brazil is being wracked by a corruption scandal at Petrobras, the country’s largest company and also its state-owned oil company.

Wall Street gets a stress test. As a result of regulation from the financial crisis, today will see Wall Street’s banks – 31 in all – get the early results of the U.S. Fed’s stress tests, which determine whether they have enough capital (relative to assets) to withstand various theoretical financial crises. The banks also have to present their plans to deal with various stress scenarios, and so will be officially judged to have passed or failed the tests next month – if they don’t pass, the consequences include not being able to pay out dividends. The annual tests, designed to stave off another 2008, do actually fail banks: last year, Citibank failed for the second time in three years, and the American branches of three foreign banks (Santander, HSBC and Royal Bank of Scotland) also failed.

Central banks and the financial crisis. How did the U.S. and U.K. central banks deal with the financial crisis? First on the list is the release of transcripts from the Fed, and the New York Times’ Upshot headline says it all: “The Fed knew the economy was a disaster in 2009. Here’s what they talked about instead.” In large part, this meant discussing who would be responsible for any losses (the American taxpayer, regardless), and generally dawdling, dilly-dallying and doubting. To be fair, it was a stressful, confusing time, and everything looks clearer in hindsight. But one of the central bankers pushing urgency at the time – in this case, a quantitative easing program – was actually Janet Yellen, who noted, “the economy is just a disaster area,” and urged the Fed to get a move on.
A spotlight has also been turned on the Bank of England regarding whether officials were involved in fraudulent liquidity auctions during the early days of the financial crisis. At the time, the Bank tried to keep money flowing by lending using low and even negative interest rates backed by all kinds of collateral. The inquiry relates to whether these auctions were rigged. An internal investigation has been ongoing since the summer, but now the U.K.’s fraud office is involved. The Bank is also feeling the strain over the fallout from how they dealt with the more recent foreign exchange rigging scandal in London.

Need to know:
TSX: 15,082.84 (-51.01), Wednesday
Loonie: 80.54 (+0.48 cents), Wednesday
Oil (WTI): $51.99, Thursday (7:15 a.m.)