Calculated Risk: The Next Financial Crisis

by Calculated Risk on 8/11/2025 01:50:00 PM

Back in 2005 I was mostly writing about the housing bubble – and the coming housing bust. But I also mentioned the possibility of a financial crisis. In early 2007, I started forecasting a recession, and by the end of 2007 the housing bust causing a financial crisis was becoming obvious.

Here is an article from the WSJ in 2007 quoting a crazy blogger: How High Will Subprime Losses Go?

Back in the U.S., the Calculated Risk blog sidestepped the colorful language and went straight for the big number: “The losses for the lenders and investors might well be over $1 trillion.”

Many people thought I was crazy. But losses for lenders and financial institutions ended up over $1 trillion.

Then in 2013 I wrote that there will be another crisis someday: “Each new generation of Wall Street wizards figures out a new way to turn lead into gold, and to become wealthy while damaging the financial system. Some of these wizards are probably perfecting their financial alchemy right now.”

The key for the “wizards” was to find a way around the regulatory system, and if they could use leverage, the fool’s gold would eventually lead to a crisis.

By 2013 the seeds were planted, not by Wall Street wizards, but by Tech Wizards. Now the seeds have taken root (Of course, I’m talking about cryptocurrency, what Charlie Munger called financial “rat poison”).

Last year, researchers at the NY Fed looked at the impact of crypto on the financial system: The Financial Stability Implications of Digital Assets. And they concluded: “that, to date, the contribution of digital assets to systemic risk has been limited, given that the digital ecosystem is relatively small and not a major provider of financing and payment services to the real economy.”

The key to preventing a financial crisis is to keep the non-regulated (or poorly regulated) areas of finance out of the financial system. A good example is the Tulip Bubble in the 1600s. Some people got rich, others were wiped out, but it had no impact on the financial system.

Unfortunately the current administration has embraced crypto. They are allowing it to creep into the financial system, and allowing 401K plans to hold crypto (aka future bagholders). There has been some discussion of allowing financial institutions to lend against crypto holdings – like for a mortgage.  This is mistake and increases the possibility that crypto will be the source of the next financial crisis.