How Worried Should We Be About the Economy? Lets Look at 2008.

It seems like only yesterday.So can yesterday’s crisis help us understand today’s threats?Perhaps.Nearly 20 years have passed since the global financial crisis of 2007-9, which was fueled by reckless subprime mortgage lending in the United States.

Now there are rumblings that the artificial intelligence boom could similarly end in tears.How worried should we be?A financial crisis is worse than an ordinary recession.

It’s when the plumbing of finance fails, and credit stops flowing even to borrowers who did nothing wrong.The Great Depression of the 1930s was an extreme financial crisis, in which 9,000 banks closed and the money supply dropped by a third.Policymakers sometimes comfort themselves with the notion that financial crises, like earthquakes, are impossible to foresee.

It “was very difficult,” Alan Greenspan said when he was chair of the Federal Reserve in 2002, “to definitively identify a bubble until after the fact — that is, when its bursting confirmed its existence.”In fact, though, financial crises are at least partly predictable, scholars from the United States and Denmark wrote in the Journal of Finance in 2022.They studied 42 countries from 1950 to 2016 and found that the danger signal is rapid growth in borrowing plus rapid growth in asset prices in the same sector over three years.

When both conditions hold, the chance of a crisis in the next three years is about 40 percent, compared with roughly 7 percent in normal times.The housing bubble that preceded the global financial crisis checked both boxes: rapid growth in both borrowing and asset prices.Housing isn’t the risk it was 20 years ago, and banks are safer.

But some of the behaviors are reappearing today in the artificial intelligence investing boom.“The lights are flashing orange,” Samuel Hanson, an author of the Journal of Finance article who is an economist at Harvard Business School, said in an interview.The level of warning should give no one comfort, he said, l...