‘I predicted the 2008 financial crash – something worse could be coming” | City & Business | Finance

The 2008 financial crisis was among the most catastrophic and wide-reaching economic calamities in living memory. Sparked in early 2007 by irresponsible lending in the US housing market, it spread globally, intensifying an already severe recession and forcing government bailouts of financial institutions worldwide. Now former hedge fund employee Richard Bookstaber – who authored A Demon of Our Own Design, which forecast the impending crash in 2007 – suggests something more severe may be looming.

“We have returned to a period of risk,” he writes in the New York Times, “one rife with the sort of pressures that have led to major financial crises. This time, the risks are spread across industries, markets and nations: artificial intelligence, the roughly $2 trillion private credit industry, stock markets, Taiwan and now Iran.” Richard highlights that many of the borrowers underpinning the lending sector are software and technology firms — precisely the types of businesses, he argues, whose services could soon be superseded by AI.

The ongoing conflict in the Middle East, coupled with a long-threatened confrontation between the US and China in the South China Sea, will only further destabilise these sectors, he cautions.

“Take Iran,” Richard writes. “An energy shock from the conflict that raises the cost of power or constrains its supply directly affects data centres and AI production.” This will drive up costs for the AI infrastructure that increasing numbers of businesses are becoming reliant on, he warns.

There is also a mounting risk that China could act against Taiwan. The Chinese government has long maintained that Taiwan is its territory, and only a strong US military presence in the region has so far prevented action.

With the US potentially entangled in a protracted and costly conflict in Iran, Xi Jinping could decide that the moment is opportune to blockade or even invade the island.

That would have a catastrophic impact on AI-dependent businesses: a single Taiwanese company supplies more than 50% of the world’s computer chips.

This would have “inevitable knock-on effects,” Richard warns, noting that simultaneous conflicts in the Middle East — disrupting global oil supply — and in Taiwan — crippling the West’s AI infrastructure — could inflict unprecedented damage on the global economy.

It is the growing interconnectedness of the world’s economies, he says, that makes a fresh financial crisis more dangerous: “Our current financial system fails not because any one thing goes wrong. It fails because different shocks propagate through the same structure and in ways that are hard to anticipate,” he writes.

“When something eventually goes wrong, it spreads faster than it can be contained.”

Richard suggests that today’s financial system could be even more vulnerable than in 2008: “The physical risks of Iran, Taiwan and the A.I. boom are supplanting the types of financial risks that preceded 2008,” he stated. “I’d take financial risk any day. Financial risk moves just prices. Physical risk moves the world.”