What Will the Next Economic Crisis Look Like?

Barry Ritholtz' The Big Picture is a wonderful blog. But given the name and my preference for visual learning, I've always thought it could use more, well, big pictures. So I was quite pleased to head over there today and find just that: A big fat picture of 14 of the biggest market bubbles of the last few centuries. Check it out:

>

And the answer key:

1. Tulip Mania
2. South Sea /Mississippi Company Bubbles
3. Railway Mania
4. Florida Speculative Building Mania
5. Roaring 1920s/1929
6. Poseidon Bubble
7. Gold
8. Japanese Asset Bubble
9. Dot Com/Tech/Telecoms
10. Global Real Estate/Credit Bubble
11. China/Shanghai Index Stock Bubble
12. Commodity Bubble
13. Oil Bubble
14. Leverage/Derivative/Financial Bubble

Talking about the last financial crises seems like a perfect set up for Simon Johnson's most recent article in The New Republic: The Next Financial Crisis. It's an informative historical analysis of the Fed's role in financial crises and why the line between fixing and creating harmful bubbles isn't as clear as you might think. To wit: Paul Volcker's interest rate cut in the early 1980s recession made real estate speculation easier, which paved the way for the Savings and Loan crisis, which Greenspan smoothed over with more easy credit, which flowed into emerging markets like Mexico and southeast Asia, whose bubbles burst in the mid-90s. And here we go again. Again!

But what will the next financial crisis look like? Johnson's got the early (exotic) previews:

The bubbles this time will likely appear abroad. Parts of Asia and Latin America, a tiny fraction of the size of the U.S. economy, are experiencing large capital inflows, low interest rates, and the beginnings of a major boom. Countries with intact banking systems and access to global capital markets will lead the next speculative wave. The United States will be pulled in--probably soon enough that we will all be surprised by a supposedly robust recovery, fed by continued low interest rates and loose credit. We all know these episodes end in tears, but they can be spectacular while they last.