This time, the danger isn’t financial engineering. It’s that our financial system has attached itself to the vulnerabilities of our physical world — power grids, water, land, supply chains — and created hazards that markets have no framework to analyze. Our models for detecting risk look at prices, volatility and correlations. They have no instruments for reading a grid failure, a drought or a severed supply chain. By the time warning signs show up in market data, the damage will already have been done.
The physical risks of Iran, Taiwan and the A.I. boom are supplanting the types of financial risks that preceded 2008. I’d take financial risk any day. Financial risk moves just prices. Physical risk moves the world.