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Unwinding QE could trigger financial crisis, warns JP Morgan

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Unwinding QE could trigger financial crisis, warns JP Morgan

Lucy Burton, financial services editor  4 OCTOBER 2017 • 2:58PM

The Wall Street bank is worried about a ‘great liquidity crisis’ CREDIT: REUTERS

JP Morgan has warned that another financial crash could be round the corner as the decade of ultra-loose money comes to an end.

Central banks have purchased roughly $15 trillion of financial assets since the crisis, but the Wall Street bank’s head of quantitative and derivatives strategy Marko Kolanovic said this will start to unwind next year in a move that could “potentially cause a financial crisis”.

Dubbing the hypothetical crash the “great liquidity crisis”, he said that outflows – or lack of new inflows – from undoing stimulus could lead to “asset declines and liquidity disruptions” that in turn trigger a crash.

“The timing will largely be determined by the pace of central bank normalization, business cycle dynamics and various idiosyncratic events, and hence cannot be known accurately,” he said, pointing out that some had started to predict the nature of the 2008 crisis two years earlier.

US Federal Reserve chairman Janet Yellen. The Fed said last month that it would start to run down the stock of bonds which it bought under its quantitative easing (QE) program.

“We think the main attribute of the next crisis will be severe liquidity disruptions resulting from market developments since the last crisis.”

His comments come a month after Deutsche Bank strategists also argued that the “great central bank unwind” could lead to the world’s next financial crisis, sounding out a warning a day after the Federal Reserve said it would start to run down the stock of bonds which it bought under its quantitative easing (QE) program.

While the US Federal Reserve’s chairman Janet Yellen said that keeping an eye on the quantitative tightening will be like “watching paint dry” sceptics have hit back with heavy warnings of a recession. The European Central Bank is set to decide on the fate of its QE program later this month, and has been urged to tread carefully.

Austrian central bank chief Ewald Nowotny said on Wednesday, for example, that the ECB should tighten monetary policy gently and avoid any abrupt changes. Deutsche Bank chief John Cryan welcomed gradually ending loose monetary policy, noting last month that the era of ‘cheap money’ needed to end as price bubbles form.