THE CRISIS NEXT TIME / THE FINANCIAL TIMES LEX ( A MUST READ )

The crisis next time

Published: August 27 2010 09:41

Never again, or at least not for a long time. That sentiment was widespread at the worst of the financial crisis. It is being expressed hundreds of times by the world’s central bankers gathered in Jackson Hole. But many investors and economists are privately fretting that another crisis is coming, and sooner rather than later. More precisely, they worry that the last one never really ended.

The real economy is not the real problem. The recovery in output may not be strong and unemployment is still looking recessionary, especially in the US. Still, the fears of a new Great Depression, so common a little less than two years ago, now seem vastly exaggerated.

The weaknesses of the financial economy are another matter. True, banks and investors have become more cautious. But total debt levels are just as high (in the US the ratio of total debt to output was the same 360 per cent in the first quarter of 2010 as in the second quarter of 2008), policy rates are lower, central banks are taking more risks, and government deficits are much higher.

Opinions vary about what will start a renewed crisis. New bubbles in developing markets could burst. The eurozone might move from grudging cross-subsidies to destabilising fight. Or the US, big in debt and deficits and small in the will to change, may prove the weakest link in the global chain. There are also arguments about timing, although few expect anything drastic for a year or so.

The diversity of views about the means does not disqualify the grim conclusion about the end. To the fearful crowd, potentially overvalued debt sits on the world’s balance sheet like a flammable compound in a creaky old tank. A spark is a spark, wherever it comes from.

Copyright The Financial Times Limited 2010.