The response of authorities to the last crisis 10 years ago was to flood the world with liquidity. Credit:Peter Braig

What if governments and policy authorities are unable to handle the next global financial crisis? Indeed, what if their declared strategy of “normalising” interest rates actually triggers the next GFC and leaves them powerless to respond?

Rather than deal with its structural causes, the response of authorities to the last crisis 10 years ago was to flood the world with liquidity – key central banks launched QE (quantitative easing) and aggressive bond-buying programs which pushed interest rates down to near zero, even negative, levels, and then held them there, supported by all sorts of budgetary injections to avoid a recession or stimulate growth and/or to bail out certain financial institutions and companies. All this has now been magnified by massive (and unparalleled) leverage, with grossly overvalued stock and bond markets.

Of course, it should also be recognised that the GFC was itself essentially created by excess liquidity; Federal Reserve chairman Alan Greenspan held US rates too low, for too long, causing a global quest for yield, resulting in a mountain of debt that was built on the securitisation and financial engineering of high risk sub-prime housing loans and other securities.

The “big surprise” has been how, with so much liquidity and such low interest rates, growth was so sluggish to respond, with so little inflation and such weak wages growth. Clearly, there is a need for a rethink by economists, as the economic relationships they had come to take for granted failed to materialise.