Physical risks change the world.
Many factors indicate a new global financial crisis that could be worse than the one that occurred in 2008, stated Richard Bookstaber, an expert in financial risk management, in an article for The New York Times (NYT). He is the author of the book "The Demon of Our Own Design," written in 2007, in which he predicted the shock a year before it happened.
Bookstaber stated that this time four key areas of risk have emerged: artificial intelligence (AI), the $2 trillion private lending industry, the situation in the stock markets, and two threats of military action, one of which has already materialized — in Iran and Taiwan.
"We understand them separately, but they are entry points into one common structure — a complex and tightly interwoven system where the specific source of tension will be less important than how quickly it can spread. And signs of systemic tension are already appearing," Bookstaber wrote on March 16.
The forecaster noted that traditional IT services are beginning to be replaced by AI, which reduces the volume of lending to firms. This raises concerns among investors, who are starting to withdraw funds from the portfolios of large private lenders like Blue Owl, BlackRock, and Blackstone, which in turn leads to a decline in their stock prices. Due to the limited information in the markets, this could suddenly lead to a mass withdrawal of funds, which usually triggers a full-scale crisis.
The concentration of investments in the hands of AI developers today has been described by Bookstaber as "unprecedented." The expert noted that the financial system before the 2008 crisis was similarly structured around the housing market and the associated lending, which predetermined its collapse.
According to him, the current outlook appears even more frightening, as it is associated with the "physical" risk of escalation in Iran and Taiwan.
"Take Iran, for example. An energy crisis caused by conflict that leads to rising electricity prices or restrictions on its supply directly affects data centers and AI production, increasing costs for companies operating in the AI sector, which then pass this burden onto our private lending and stock markets," he explained the interconnection.
Possible military actions by China in Taiwan create a similar risk due to the concentration of semiconductor production on the island, which is also necessary for AI.
Bookstaber admitted that towards the end of the 2008 crisis, he told young colleagues at the Treasury that such a situation was unlikely to repeat, but now he is "not so sure."
"The physical risks associated with Iran, Taiwan, and the AI boom outweigh the financial risks before the 2008 crisis. I would prefer to deal only with financial risks; financial risks only affect prices. Physical risks change the world," Bookstaber summarized.
The start of the 2008 crisis was marked by the bankruptcy of Bear Stearns, the fifth-largest investment bank in the U.S. at the time, with assets of about $400 billion. This triggered a chain reaction that affected another bank — Lehman Brothers, which was actively developing the mortgage bond market, i.e., securities backed by mortgage debts.
"Bear Stearns was the first to collapse, and it happened suddenly, but when it came to Lehman Brothers, AIG, and some other companies, economists and Fed officials began to roughly calculate what would happen. You see the unemployment rate reaching 30% — consequences comparable to the Great Depression," recalled Bob Hoyt, a financial services expert, in an interview with the Washington Post (WP) last year.
