I will argue that the current situation is the iconic milestone of the clear END of the 2008 crisis. Here is my argument:
What was the Lehman Crisis about? In September 2008, we were facing an under-regulated banking sector and fears of rising interest rates (due to presumed inflation generated by USD 140 oil prices).
What is the current Deutsche Moment about? In September 2016, we are facing an over-regulated banking sector (the US Department of Justice throwing an USD 14bn fine at Deutsche Bank) and fears of never rising quasi-zero (in Germany even negative) interest rates.
It is apparent that during the 8 years between the Lehman Crisis and the Deutsche Moment the nature and the source of banking instability have turned 180 degrees. Therefore, in my eyes, the Deutsche Moment is the true hallmark of THE END OF THE 2008 CRISIS. This is the moment, when the world is realizing: too much regulation and too heavy punishments are counter-productive (Deutsche immediately rebound from an under USD 10 share price to a near USD 14 share price when the DOJ reduced its presumable fine to USD 4.5bn) and a permanent 0 rate environment is unsustainable (it erodes the profitability of banks to an extent where their liquidity and capital positions are hurt, thereby causing global financial damages).
There are two key questions looking ahead:
(1) What will happen to the current 0 rate environment?
(2) What will happen to the over-regulation of banks?
- Rates Going Back to Normal: Historic average nominal effective interest rates in the United States are around 4.5 to 5.5 percent. The situation we are in since December 2008 is absolutely unique and uncommon in global monetary history (as well as in US monetary history). Permanent 0 rates are destructive, unsustainable and unnecessary in many ways: it encourages financial engineering (such as share-buybacks) over real capital investments; it encourages bubbles in asset prices (a great example is the real estate market); it goes against the Taylor Rule (the monetary rule defining ideal nominal interest rates in relation to growth and inflation); it keeps the currency permanently week which releases pressure from productivity (we see that productivity-growth was way below average since 2008 in the United States); stock markets and household net-worth are in historic heights; unemployment is between 4.8 and 4.9 percent which is considered as de facto full employment; CPI is over r at 2.0 percent (which is the target of the Fed).
As Alan Greenspan very smarty and clearly articulated recently on Bloomberg: “I cannot perceive that we can maintain these levels of interest rates for very much longer, they have to start to move up and when they do they could move up and surprise us with the degree of rapidity which may occur.”
Why does Greenspan talk about the surprising rapidity of rate-hikes? Because he is well aware of the forgotten rule of monetary economics, described by John Maynard Keynes as the ‘Liquidity Trap’. The ‘Liquidity Trap’ occurs when rates are permanently zero. In this case the rise of the monetary base (i.e. new money printed, QE) does not precipitate in inflation. It is like a car’s gear shift: the lower gear you are in, the higher acceleration (growth of prices i.e. inflation) you can expect. Except for being in gear zero (a zero rate environment, i.e. in ‘neutral’ gear), when the acceleration is basically zero and your car is standing still. This is the same with monetary policy and inflation: lower rates take your economy to higher inflation, except for permanent 0 rates, which take your economy to neutralizing (i.e. putting into a trap -> the ‘Liquidity Trap’) the additional liquidity (i.e. the marginal monetary base created by QE). But once you put your car into gear, you will experience exponential acceleration and to tame your car and reduce acceleration you will have to keep changing the gears upwards (raise rates).
- Regulatory Environment Easing Up: Banks are utterly over-regulated and this is the result of a world-wide series of overreactions from politicians and regulators. The Deutsche story is iconic, because this bank was incidentally pushed down by the DOJ fine, yet continuously hurt by having to terminate over regulated business lines in the last five years. Politicians and regulators will realize: now the tide has turned and as opposed to 2008 now systemic risk is coming from OVER-regulation, not from any sort of laissez-faire UNDER-regulation.
These are the reasons and this is the argument why I am convinced: the Deutsche Moment is not the continuation, but the symbolic end of the 2008 Crisis, yet it is the beginning of a NEW ERA, the era of normalizing interest rates and balancing regulatory over-scrutiny.
My motto therefore is: BACK TO NORMAL!
Source : Bloomberg and some of the views from David Gyori