From JP Morgan’s CEO Jamie Dimon’s Letter to Shareholders 2018::

There are some modest negatives or potentially important differences (than during the last crisis):

• Far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.

• Even more procyclicality has been built into the system. Risk-weighted assets will go up as will collateral requirements – and this is on top of the procyclicality of loan loss reserving.

• Market making is dramatically smaller than in the past (e.g., aggregate primary dealer positions of bonds – including Treasury and agency securities, mortgage-backed securities and corporates – averaged $530 billion in 2007 vs. an average of $179 billion today). While in the past that total may have been too high, virtually every asset manager says today it is much harder to buy and sell securities, particularly the less liquid securities.

• Liquidity requirements, while much higher, now have an element of rigidity built in that did not exist before. Banks will be unable to use that liquidity when they most need to do so – to make loans or intermediate markets. They have a “red line” they cannot cross (they are required to maintain hard and fast liquidity requirements). As clients demand more liquidity from their banks, the banks essentially will be unable to provide it.

• There has been an excessive reliance on models (which I spoke about earlier in this section).

• The continuous politicization of complex policy is an issue. No one can believe that very detailed and complex global liquidity or capital requirements should be set by politicians.

• No banks to the rescue this time – banks got punished for helping in the last go-round. It would be a reasonable expectation that with normal growth and inflation approaching 2%, the 10-year bond could or should be trading at around 4%. And the short end should be trading at around 2½% (these would be fairly normal historical experiences). And this is still a little lower than the Fed is forecasting under these conditions. It is also a reasonable explanation (and one that many economists believe) that today’s rates of the 10-year bond trading below 3% are due to the large purchases of U.S. debt by the Federal Reserve (and others). This situation is completely reversing. Sometime in the next year or so, many of the major buyers of U.S. debt, including the Federal Reserve, will either stop their buying or reverse their purchases (think foreign exchange managers or central banks in Japan or China and Europe). So far, only one central bank, the Federal Reserve, has started to reverse QE – and even that in a minor way. However, by the end of this year, the Fed has indicated it might reduce its holding of Treasuries by up to $150 billion a quarter. And finally, the U.S. government will need to sell more than $250 billion a quarter to fund its deficit. There are two offsetting factors to the large sales of Treasuries. One is that as the Federal Reserve sells, it reduces excess reserves, which requires banks to buy Treasuries to meet liquidity requirements. But we do not fully know the extent of this scenario, and it certainly won’t be dollar for dollar. The second factor, as some argue, is that the U.S. trade deficit effectively forces foreign countries to use their dollars to buy Treasuries, although this is not completely true – they can buy other U.S. securities or assets or sell their dollars. So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.