A financial crisis 2025 isn’t out of the question; the catalyst is debt
Such crises follow a familiar pattern, whether the cause is a housing bust, a global pandemic or, in the current case, the premeditated actions of the world’s biggest economy.
The catalyst is debt,
which investors use to buy many times more assets than they otherwise could.
When prices fall sharply, lenders demand more cash collateral or pull out entirely, forcing asset sales that send prices down further in a vicious cycle.
If the assets aren’t worth enough to pay all the debt, lenders suffer losses. If those losses threaten the financial system and the broader economy, governments must step in with taxpayer-funded bailouts.
Ideally, financial companies should have ample resources to absorb losses and prevent contagion.
They don’t.
In one of the world’s most important markets, US Treasuries, hedge funds are so leveraged that spikes in volatility can quickly send them to the exits.
US Treasuries, far from offering shelter from the turmoil, are suddenly losing their haven appeal.
Systemically important banks
GSIBs; Globally systemically important banks
lack the equity capital needed to survive worst-case scenarios on their own.
The main public backstop — the US government — is itself troublingly stretched, with vast budget deficits rapidly expanding a sovereign-debt burden that is already the largest since the last world war.
Financial institutions abroad hold dollar-denominated assets funded by borrowing in dollars. To prevent that funding from evaporating in a crisis, the Fed has established currency swap lines that empower counterparts such as the European Central Bank and the Bank of England to lend the US currency.
https://englundmacro.blogspot.com/2025/04/1929-no-longer-london-not-yet-new-york.html
It’s unfortunate that policymakers need to contemplate a self-inflicted crisis of this kind. But the possibility must be taken seriously.
Bloomberg Editorial 16 april 2025
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