Four flashpoints that could threaten financial stability

DALLAS is almost 5,000 miles from London. But when the United Kingdom’s gilt markets imploded last week – forcing the Bank of England (BOE) to make a £65 billion (S$104 billion) intervention to support pension funds – the drama left Richard Fisher, former chair of the Dallas Federal Reserve, wincing.

Fisher has warned for years that a decade of ultra-loose monetary policy would create pockets of future financial instability. So he sees the British gilts drama (which occurred because the pension funds mishandled highly-leveraged bets) not as an isolated event – but as the sign of a trend.

“This (foolish strategy) always happens when rates are near the zero bound and things have gone to an extreme,” he told CNBC, noting that the crisis is “an indication of other things that are likely to pop up” because investors and institutions have been dangerously overleveraged and “thinking that rates will stay low forever”.