Can world weather another crisis?

As stock markets hit record highs, rising financial fragility is setting off alarm bells across the United States and Europe. The International Monetary Fund has recently echoed these concerns, stoking fears of a looming crisis.

- Jayati Ghosh

Drivers push auto rickshaws in a line to buy petrol from a fuel station in Colombo on June 29, 2022, amid Sri Lanka's debt crisis.

(REUTERS)

The warning signs are everywhere — and they are disturbingly familiar. Asset prices are climbing well beyond what can be justified by underlying fundamentals, while non-bank financial intermediaries now play a similar role to that of “shadow banks” in the years leading up to the 2008 financial crisis. At the same time, the rise of stablecoins has pulled regulated banks into the opaque world of cryptocurrencies, and vast sums of speculative capital are flooding into Al stocks, driven more by hype than by proven returns.

These trends bear the unmistakable marks of a financial bubble entering its most precarious stage, when even minor shifts in investor sentiment can trigger a sharp correction. The recent collapse of US auto parts supplier First Brands and subprime auto lender Tricolor, both heavily leveraged and closely linked to non-bank financial institutions, may be early indications of structural vulnerabilities that are only just coming into view.