Over the last year, US President Donald Trump’s economic policies – including a fiscal blowout, the demolition of the international trading system, threats to the Federal Reserve’s independence, and erosion of the country’s long-term innovation capacity – have been triggering alarm bells in the United States and globally. Add to that a frothy AI sector, the normalization of crypto, proliferating climate-related disasters, and growing public-debt burdens, and the global economy appears beset with risk. In this Big Question, we ask Anat R. Admati, Hilary J. Allen, Jayati Ghosh, Simon Johnson, Corey Klemmer, and Erin Lockwood, (political science) whether a major crisis is imminent, and how economies can mitigate the fallout.

"Having studied the GFC, and the role that inadequate risk models and minimal regulation played in fueling it, I am increasingly concerned about financial risk. While a crisis may not be imminent, the ingredients are certainly there," says Lockwood. "At the heart of the 2008 crisis were highly correlated defaults that far exceeded risk models’ projections for maximum losses. These upended investment strategies, triggered credit-derivatives payments, forced margin calls, and left highly leveraged firms without the liquidity to make good on their debts. Regulators had left it up to financial institutions to measure their own risks and allocate capital buffers accordingly. As a result, those institutions failed, triggering a crisis that spilled over into the real economy."

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