How The Global Financial Crisis (GFC) Affected Speculation

An interesting article by Patrick Artus for Flash Economics Economic Research examines the impact of the worldwide response to the GFC on speculation. 

Given that rampant speculation—particularly in the housing sector—was one of the factors that precipitated the GFC in the first place, did the measures taken to sort out the mess curb speculation (the logical outcome), or did they fan it higher?

The article looks at some key data on global speculative activity to answer that question.

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What was done to defuse the crisis?

Affected countries reduced interest rates to near-zero, pumped in trillions of dollars of liquidity and worked (or are still working on) regulatory provisions to curb unbridled speculation.

What was expected?

The GFC should have caused a psychological shift to risk aversion, and the measures taken should have set off a chain of global deleveraging, thereby reducing speculation.

But… what happened?

The monetary expansion led to a massive growth in money and depressed both short- and long-term interest rates—factors made to order for exciting speculation.

The size of future positions in commodities and currencies increased:

GFC

Low cost (read: free) money sloshed over into emerging markets seeking interest arbitrage:

GFC

Interest rates on 10-year government bonds showed a massive divergence between countries:

GFC

The table below gives an interesting slant on how the tidal wave of easy money affected some countries less, and others more:

GFC

According to the author, the QE measures increased volatility in exchange rates and share prices in emerging markets. In the peripheral Eurozone countries, interest rate volatility rose sharply. However, OECD countries, and those viewed as ‘safe’ countries, saw less variability in interest rates and share prices.

Bottom line on GFC

The author concludes that the fallout of the GFC was a sharp jump in global speculation, with a few exceptions such as the safe haven countries.