Time for a little global financial chaos

An economist friend asked me to write about the possibility of a global financial crisis. He told me that he’s hearing a lot of chatter from his finance friends that “something is breaking”. That feeling is understandable. It seems like every day we hear fresh news of financial chaos — fears of default at Credit Suisse and some other big European banks, capital outflows and currency drops in Asia, and various other signs of financial terror and stress.

In general, my advice is to stay calm, especially if you live in the U.S. There are various financial stress indexes — the St. Louis Fed, the Chicago Fed, and the Office of Financial Research all maintain their own — and none of them seems to show that we’re in a crisis. The only index that shows elevated financial stress is the OFR’s, and it’s not particularly severe:

As you can see, the main reason this index is a little bit high is because stock values are trading lower and there’s been a bit of volatility in various financial markets. That’s obviously not fun if you’re an investor, but it’s also not generally the end of the world.

As for Credit Suisse, fears of a Lehman-like blowup are probably overdone. To see why, read some tweets by my friend (and occasional guest blogger) Benn Eifert:

And by all accounts, Credit Suisse’s problems seem to be pretty specific to that company, rather than part of a larger crisis in the European banking system.

In addition, just as a general rule, I would resist the urge to lump all the scary stuff you see in the news into one giant global “polycrisis”. There has never been a time in history when the world hasn’t been full of risks and challenges.

That said, there are some reasons for concern, especially if you live outside the U.S. Global inflation, the Ukraine war, and various countries’ policy mistakes are the underlying drivers here, of course. But let’s take a look at a few of the more proximate causes, and see if we can figure out why some people feel like “something is breaking”. And then let’s talk a bit about what sort of global financial problems we might see.