Why the Next Global Financial Crisis Won’t Look Anything Like 2008

Bobby Seagull had already purchased a shopping trolley when he arrived at Lehman Brothers’ Canary Wharf office in September 2008 at six in the morning. Additionally, he had spent three hundred pounds of his vending machine card on chocolate because he thought the machine might outlive the bank. Compared to most of the scholarly explanations of what went wrong, that particular detail has stuck with me longer. People were aware. The air had changed, but they were unsure of what or when.

The problem is that, after nearly 20 years, the air feels different once more. If another crisis arises, it most likely won’t happen in the same manner as the previous one. There won’t be lines forming around a Northern Rock branch or the made-for-television scene of workers carrying out their careers in cardboard boxes. The next one might begin somewhere that most people aren’t even looking.

There are echoes, according to Sarah Breeden of the Bank of England, using the cautious language used by regulators when they are concerned. In the last fifteen years or so, private credit—the lending sector that developed alongside the regulated banking system—has grown from nearly nothing to about $2.5 trillion. There hasn’t been a true downturn to test it. She talks about a layer cake of debt, which she refers to as leverage on leverage on leverage. What’s unsettling is that no one seems to know how tall the cake really is.

It’s difficult to miss the irony. Regulators advised banks to hold more capital, lend less carelessly, and exercise greater caution after 2008. As a result, a parallel system that performed the same functions as banks but with less oversight developed beside them. Mohamed El-Erian, who has lived long enough to notice the trend, claims that the parallels to 2007 keep him up at night. He notes that people tend to make mistakes when they have too much money.

Sovereign debt comes next. The period of cheap money that made the pandemic bearable is over, and governments borrowed a great deal during it. The cost of refinancing has increased, sometimes significantly. In the past, debts that only became apparent after wars are now present in some developed economies. Bond markets have shown patience, but this does not equate to confidence.

The slow-motion issue of commercial real estate is unique. office towers that are half-empty in cities that still don’t know what they are. Loans that were made for a world before remote work are due in a future that doesn’t exist. There won’t be significant losses. They will seep into pension funds, regional lenders, and balance sheets that appeared to be in good shape last quarter, much like water damage does.

But it’s not really the markets that set this moment apart from 2008. It’s everything in their immediate vicinity. Sanctions, trade wars, and unexpectedly broken supply chains. In contrast to earlier times, a financial system now has to price geopolitics. Furthermore, central banks, who were instrumental in saving the last crisis, have already employed the majority of their resources. They might not be able to come to the rescue at all if inflation spikes during the next recession.

Watching this gives me the impression that the panic phase isn’t the most dangerous. It’s the earlier silence. Nobody is aware of the unsuccessful auction. The fund that controls withdrawals on Friday afternoons. The confidence is typically gone by the time it appears on the front page.

Bobby Seagull, with a shopping cart and a card for a vending machine, saw it coming. Most of us most likely won’t.