It is very difficult to provide a forecast even a medium, but we formulate an idea based on the past and the present. Looking at the global imbalances we can say that there are many factors behind global imbalances:
1. Shifts in private or public saving behavior
2. Changes in current or expected productivity growth,
3. The accumulation of foreign exchange reserves
4. Movements in commodity prices
5. Shifts in investors' attitudes towards risk or liquidity.
Analyzing the past we see these broad scenarios leading up to the crisis:
a. During the 1996-2000 the global imbalances started emerging and were largely driven by “buoyant prospects” in the U.S., relative to China, which attracted significant FDI and portfolio equity flows.
b. During the 2001-2004, the declining saving became a big part of the U.S. deficit. Foreign purchases of U.S. bonds especially by China became dominant.
c. During the 2005-2008, the U.S. deficit increased further. China among others accounted for most of the surplus, with the commodity prices and reserve buildup playing an important role.
One of the main issues of the crisis was the global imbalance and to be able to do a forecast, it would be worthwhile to understand if the Global Imbalances good or bad? In today's global economy, even the different saving behaviors among the different economies can cause natural imbalances to emerge. Even the rate of return on capital among different economies can cause natural imbalances. Therefore, we can state that the imbalances are not bad, unless they reflect some issues or distortions or may lead to problems, as it happened in the current crises.
Now going back to the financial crisis, what this crisis has done is that the Government debt has risen, especially in the US; the Wall Street has lost its credibility; equities have fallen all over; the mentality has changed, people are now averse to the risky complex stuff and are favoring the safest options, i.e. the flight to safety mentality. It has emphasized the importance of the old school of thought where people were conservative in their risk taking and had a pessimistic view to the risk behavior. It brought forward the deficiencies of the new generation, the young aggressive blood, and way of thinking. It was this difference in the personality traits that made the difference in the way the various economies fared through the crisis.
1.1 Forecast points
1) While the global imbalances between US (large current account deficits) and China (large current account surpluses) have reduced somewhat in 2009, but going forward if some major policy changes are not done, both by the US and China, they will increase again, although may not to up to the pre-crisis levels. Looking at the current economies and the policies of the US Government it seems that the borrowing needs of the US are going to rise, thus further impacting the Global Imbalances. Also the Chinese appetite for the US Treasury bonds should decrease.
2) This was the biggest recession of all times and the incoming generation's way of thinking will be based on this crisis and should be more mature and risk averse, at least in near future.
3) The average household, corporate savings should increase in the US. Increase savings will most likely result in weak global demand thus impacting the economic recovery, especially the Chinese exports. Thus the Chinese will need to increase the internal consumption, so that the over reliance on the exports can be reduced. For that the investments will be made on improving the domestic infrastructure and to maintain the employment and to boost the domestic spending.
4) The current the hub and spoke pattern of capital flow between the state entities might not be relevant in future. Following example might make it clear, today the money flows from China to the North Atlantic and Brazil borrows from the North Atlantic. Now, Instead of following the hub spoke pattern, the two state entities decide to transact directly, e.g. China & Brazil. It would help Brazil to get a ready supply of capital and will provide China less risk on defaults, in the form of assets, which they can get in form of securities. This will generate long term political and economical relationship, where the capital flows between the entities will not be driven by the market forces but will be based on the long term political and economic considerations.
5) The exchange rates across the world will get impacted, as currently the focus has moved to role of the exchange differences between the Yuan and the USD on the current crisis. Exchange rates will also be impacted in case the two state entities (e.g. China & Brazil) might decide to transact in Yuan instead of US$, so as to minimize the risk of the jumping Exchange rate and the liquidity.
6) In today's world, US dollar is considered as the reserve currency of the world. This might change. If we extend point 4 further and in the scenario where lots of different economies start dealing with China directly in Yuan, then there is a possibility of having two (maybe more) world currencies existing until the switchover is done from USD to Yuan as the reserve currency. But this is not something that can be done easily and is not likely to happen within the next decade, but is a possibility for the future.
7) Stringent Regulatory requirements along with proper oversight of the financial institutions and the ratings agencies will be implemented. The shortcomings of the theory that the market forces will take best options available and no oversight is required have been exposed. One more example to explain the shortcomings of this theory is as follows: As mentioned in point 5 above, if a group of state entities start the capital flows within themselves and only within themselves based on their political relationships and economic considerations, without any regard for other economies, then in that scenario the value of the market driven transactions will be lost, as only a select group of entities will be lending and borrowing to each other. The Capital flows will get distorted.
8) China is currently converting its excess foreign reserves into claims on the natural resources around the world and this is likely to continue in the coming years, in the form of direct ownership or long term partnerships.
9) Due to the changed landscape of the global landscape and the extent of the impact on the US and the European banks, we might see further consolidation and the emergence of more Asian banks. US & European might no longer be dominant, as they were before the crisis.
All these will have an impact on the strategies of the global banks such as Credit Suisse.
1) As per some experts there is high possibility of further major losses still in the pipeline for many banks, and these losses will swallow up a substantial part of their profits for the next ten years.
2) There is very high probability of the tightening of the regulations especially in US to restrain the leverage and risk-taking, as done in the past by the banks. Extra measures such as banks could be asked to have extra capital buffers, the minimum liquidity standards could be imposed, among other similar measures.
3) Another aspect could be that the regulatory environment will differ greatly from one country to the next. The impact of all this is likely to vary somewhat among banks and between countries, as was recently evident by the extra taxes being imposed on the bonuses by some nations. This could prove advantageous to some global banks.
4) The banking arena might change and some of the large and strong Asian banks might play a bigger role at the global level, thus reducing the dominance of the US and Europe banks.
5) As highlighted above there is a possibility of having more than one reserve currency. Now instead of being the world's largest creditor, US is now the world's largest debtor, it threatens the credibility of the US dollar and provides incentive to move to another currency. This will be both a threat and an opportunity to the global banks.
6) With the environment and sentiments adverse to excessive risk taking, it will be difficult for the bank to generate revenues up to the past levels. Another aspect is that the wealthy segment in favor of taking risk in order to increase their funds at an accelerated rate will add to the premium in risk taking, thus providing more challenges and opportunities to the global financial institutions such as Credit Suisse.