Massive global debt is a serious concern for banking and finance. One would have thought that after the banking crash of 2008, banks would have learned the bitter lessons of that time, never to be repeated. That was not the case.

Global banks today continue to take foolish risks and hide questionable debt in fairy tale products, using secret accounts to cover up financial iniquity and exploiting loopholes in the law meant to protect consumers from fraud and greed.

The fact is finance is a sector “too big to fail.” Banking and finance are essential to the bloodstream and health of the global economy. If banking fails, the global economy fails. If the global economy fails, then our standard of living takes a hit with mass unemployment and business and personal bankruptcy.

We are all dependent on banks directly and indirectly. The local, national and global economy is driven by debt. This debt, owed to the wealthy and investors, is represented by mortgages, business loans, overdrafts, car and home loans, college loans and more.

Pundits expect the next financial crisis to be worse than the 2008 meltdown.

The world is $300 trillion in debt. In another unsustainable debt crisis, there may be no remedies. Lending will cease. If lending ceases, the global economic engine will grind to a halt.

 

A warning

Okay. The preceding narrative is simply a warning. But the risk of Covid-19 stimulus spending becoming unsustainable with the world already facing a debt mountain is real.

Today banks can still pay their own debts, pass regulatory capital tests, and maintain a semblance of stability and credibility that is crucial for confidence in the global financial system.

However, with the onset of the pandemic, loan defaults are up and investors in finance are fearful.

Consumer demand has taken a hit during this pandemic, and this has impacted businesses that depend on banking to keep their doors open, their employees in work, and their profits turning.

There is a symbiotic relationship between banks on the one end and business and government on the other: The two sides operate like a seesaw, with each affecting the other.

 

Positive note

The one note of comfort is that owing to the 2008 crisis banks have increased their capital base to protect against uncertainty and recession like we face today.

However, banks will not have sufficient capital to survive a serious economic implosion that will start with mass debt default. Banks have not learned much from 2008, it would appear.

Laws designed to prevent banks from taking unsustainable and irresponsible risk have failed.

The pandemic has made matters worse with broken supply chains, mass unemployment, and thousands of businesses underwater or hitting the proverbial wall.

A banking collapse may have investors running for the hills. This will lead to depression. And depression has dire global consequences that are impossible to predict.

 

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