The American financial system today does not look the same as it was before the crashes of 2001 and 2008, yet there have recently been some familiar signs of fear on Wall Street, such as days when trading is wild with no real results, sudden price fluctuations, and a feeling among many investors that they have solved With an increased sense of technical optimism, according to the British magazine The Economist.

After stocks jumped on Wall Street in 2021, they recorded their worst performance since 2009 last January, falling by 5.3%, and the prices of assets preferred by retail investors, such as technology shares, cryptocurrencies, and electric car makers, also declined.

According to the magazine, these data indicate that the new US financial system is still full of risks in light of rising asset prices, at a time when central banks are raising interest rates to tame inflation, and the US Federal Reserve is expected to implement increases by 5 quarters.

According to The Economist, a combination of high valuations and high interest rates can easily lead to large losses with a higher rate used to discount future income.

And if there are big losses, the important question for investors, central bankers and the global economy is: Will the financial system absorb them safely or amplify them?

Which seems unclear due to the changes that have taken place in this system over the past 15 years by two main forces: regulation and technological development.

The new capital rules, says The Economist, pushed a lot of risk-taking out of the banks, digitization gave computers more decision-making power, created new platforms for owning assets and reduced the cost of trading to almost zero, resulting in a high-frequency system based on Market logic with a new set of players.

Regulation and technological development are among the things that have changed the American financial system (Getty Images)

changes in the financial system

According to the magazine, many of these changes have taken things in a better direction, as they have made it cheaper and easier for all types of investors to deal in a wider range of assets.

The collapse of 2008-2009 showed the danger of catastrophic losses for banks that took deposits from the public, forcing governments to bail them out. Today, banks are less central in the financial system, have better capital and fewer high-risk assets, while their risks are limited to funds. Backed by shareholders or long-term savers who are more willing, on paper, to absorb losses.

However - says The Economist - the reinvention of the financial system has not eliminated the excessive confidence of banks, there are still two main risks:

  • The first is that some leverage is hidden in shadow banks and investment funds.

    For example, total loans and deposit-like liabilities for hedge funds, trust funds, and money market funds have risen to 43% of US GDP, compared to 32% a decade ago.

    Companies can also accumulate huge debts without anyone noticing. For example, the company "Archigos" (a shadowy American family investment office) defaulted last year;

    causing $10 billion in losses to its lenders.

  • The second risk is that although the new system is more decentralized, it still relies on transactions that are routed through a few channels that are subject to fluctuations;

    Automated exchange-traded funds - with assets of $10 trillion - rely on a handful of small businesses to make sure the price of funds accurately tracks the underlying assets they own, while trillions of dollars in derivative contracts are channeled through 5 US clearinghouses, and many are executed. of transactions by a new generation of intermediaries.

other reasons

It is noteworthy that the Wall Street Stock Exchange closed at the end of last week sharply lower, with investors feeling worried about the exacerbation of tension between Russia and Ukraine.

Most of the 11 major sector indices of the Standard & Poor's 500 Index declined, led by the technology sector, while the energy sector index rose with the rise in oil prices to its highest level in 7 years.

Shares of Apple, Amazon, Nvidia and Microsoft fell, affecting more than any sector in the S&P 500's decline.