Where a crisis could start
The Wall Street Journal
Ten years after the collapse of Bear Stearns, “the seeds of instability are germinating again,” said Greg Ip. The good news is that trouble probably won’t come again from a teetering financial firm; rules that require “thicker buffers of capital” and prohibit some risk-taking make a big-bank failure “pretty remote.” That doesn’t mean we won’t have a major financial crisis, however. Making our banks stronger simply makes our banks stronger; we need to “ask where the new dangers are” instead of just “focusing on known past weaknesses.” Earlier financial crises, after all, were a surprise precisely because they started with a false assumption, one that everyone took for granted: in 1997, that Asia’s fixed exchange rates wouldn’t break; in 2007, that housing prices would never decline; and in 2011, that euro members wouldn’t default. What’s our blind spot now? It could be the assumption that we won’t see markedly higher inflation or higher growth. The sustained increase in interest rates that would follow such rises could be hugely problematic for U.S. debt levels, which are back to “crisis-era peaks.” There’s also the matter of China’s debt levels, which have surpassed those of the U.S. The truth is that we don’t know where a crisis will happen or what may trigger it. That doesn’t mean we shouldn’t be proactive about the trouble spots.