The Other Financial Crisis

Brad DeLong recently reminded people of his essay from October 10, 2008 that started thusly:

All of us from Lawrence Summers to John Taylor were expecting a very different financial crisis. We were expecting the ‘Balance of Financial Terror’ between Asia and America to collapse and produce chaos. We are not having that financial crisis. Instead we are having a very different financial crisis. Catastrophic failures of risk management throughout the entire banking sector caused a relatively minor collapse in housing prices to freeze up global finance to a degree that has not been seen since the Great Depression.

True enough. I wonder, sometimes, though how likely it is that if it starts to look like we’re seeing this crisis clear, then we suddenly do get that other financial crisis. After all, one thing that happens in a crisis, it seems, is that people flock to US treasuries bolstering the value of the dollar and making debt-finance look easy. Absent a crisis, that psychology can flip, leaving us with the other crisis.