Today it seems that every time the stock markets twitch, doom mongers race to offer their predictions of an impending financial armageddon. The dramatic fall in Chinese stock markets last month, followed closely by a record 1,000 point fall in the US market, prompted another rash of pessimistic tweets, articles, and speeches. Economists and pundits were more or less standing out on street corners with megaphones and sandwich boards declaring the apocalypse.
However, is talk of a financial crisis real, or is it just a case of pundits not wishing to look like they were caught unawares again? Following the post-2007 crisis ritual humiliation of economists, pundits, wealth mongers, and almost anyone who has anything to do with money who failed to see it coming - which was just about everyone - this is understandable. People have economic models that need to be respected, and if they miss another cataclysmic event, they may as well pack up and go home.
The high calibre of some of those predicting another crisis, however, should be of huge concern. Last month, Rupert Murdoch warned of the precariousness of the global economy, tweeting that: ‘All prices dropping not just shares. Timely correction or sign of major global crisis in near future?’. Other billionaires have also expressed concerns - Sam Zell and Carl Icahn among them. Perhaps the most direct warning has come from billionaire money manager, Crispin Odey, who said: ‘Everything points to it being a bubble. You can never know the height of a bubble, but by the time it gets to here, you haven’t got much time.’
A number of notable Cassandras from the last crisis have also joined the bandwagon. Raghuram Rajan, the former IMF Chief Economist who famously warned of the 2007 financial crisis back in 2005 in his paper ‘Has Financial Development Made the World Riskier?’, has now warned that central banks are globally being pushed into ‘competitive monetary policy easing’. Rajan has warned that the global economy is ‘slowly slipping’ into the Great Depression-like problems of the 1930s, and that central banks need to come together to define new ‘rules of the game’ to find a better solution to deal with it.
Andy Redleaf, a successful hedge fund manager who also saw the crisis coming, is also worried, telling CNBC: ‘I think it is a truly scary time.’
Federal Reserve Board Vice Chairman Stanley Fischer has emphasised the need to be aware that the next crisis, noting that it will ‘not be identical to the last one and that we need to be vigilant in both trying to foresee it and seeking to prevent it.’ After the last financial crisis, Paul Krugman warned that the idea people would have acted differently if they'd known what was coming was a delusion.Given the sheer volume of predictions this time around, regardless of any scepticism, it cannot be said that we are sleep walking into another crisis. We are walking in wide awake, but despite the lessons of the past, governments appear to be no nearer to finding a solution. Governments are still looking at old solutions and old economic ideas, they are simply masking them with new language. The tradition of all dead generations weighs like a nightmare on the brains of the living.
The world has changed a lot since the last crisis though, and the CFO has a whole new set of tools at his disposal to survive. Many have rebuilt cautiously and diligently, keeping costs low and adopting new technologies that automate systems. For the CFO to guide their organization through a future crisis, they must hope for the best and plan for the worst. CFOs must develop and utilize a deep understanding of financials and liquidity to understand how volatile prices and demand will have an impact on the performance of their companies. If not, they will fail to manage threats which could bring down their company, and they may find that the financial resources required for countercyclical investments and no longer available.