Regardless of the source of trouble, the question is whether the world is better equipped than it was a decade ago to cope with another financial crisis, whenever it arrives. Banks in most countries are more prepared for a downturn. But when a crisis does inevitably break out despite new layers of safety measures, central bankers and finance ministers will be no readier to battle the flames. In some respects, they’re even less ready—their hands have been tied by new laws and opposition from the Left and the Right to bailouts.
Ray Dalio is worried about the world’s preparedness to fight the next global conflagration—though he doesn’t see one arriving anytime soon. “There’s a cycle here,” says Dalio, founder and co-chief investment officer of Bridgewater Associates LP, the world’s biggest hedge fund firm. “What they did was to write regulations that reduced the chance of a financial crisis but significantly limited the flexibility in dealing with it.”
Emerging-market economies, as opposed to American subprime mortgages, are the current area of concern. The Institute of International Finance says emerging-market economies had more than $8 trillion in debt in foreign currencies such as the U.S. dollar and the euro at the end of 2017, up from less than $5 trillion a decade ago. Raghuram Rajan, the former head of the Reserve Bank of India who foretold the last crisis in 2005, says, “the traditional ingredients have been put in place” for another meltdown. “The betting would be, yes, we will see accidents,” says Rajan, an economist at the University of Chicago Booth School of Business. “How bad will it get? No one knows.”
