Fighting The Next Big One

Prevention isn’t enough. Regulators will need more tools when disaster inevitably strikes.

- Peter Coy

Ten years after the fall of Lehman Brothers, trouble is brewing again, though this time the U.S. hasn’t slid into a recession. In fact, growth is so strong in America that the Federal Reserve is trying to preempt inflation by raising interest rates, and that’s attracting speculative investors from the rest of the world to the U.S.—to the detriment of emerging markets. Argentina and Turkey are most under pressure, followed by Brazil, India, Indonesia, Pakistan, Russia, South Africa, and others. “We are having a confidence crisis in emerging markets, with some level of contagion being present,” says Pablo Goldberg, a portfolio manager at BlackRock Inc. in New York.

Regardless of the source of trouble, the question is whether the world is better equipped than it was a decade ago to cope with another financial crisis, whenever it arrives. Banks in most countries are more prepared for a downturn. But when a crisis does inevitably break out despite new layers of safety measures, central bankers and finance ministers will be no readier to battle the flames. In some respects, they’re even less ready— their hands have been tied by new laws and opposition from the Left and the Right to bailouts.

Ray Dalio is worried about the world’s preparedness to fight the next global conflagration—though he doesn’t see one arriving anytime soon. “There’s a cycle here,” says Dalio, founder and co-chief investment officer of Bridgewater Associates LP, the world’s biggest hedge fund firm. “What they did was to write regulations that reduced the chance of a financial crisis but significantly limited the flexibility in dealing with it.”