"The difficulty lays not so much in developing new ideas as in escaping from old ones."

This is particularly difficult today because the "old ones" are not really that old. Many financiers and risk analysts draw their principle lessons from events of the past dozen or so years: the 1994 bond and derivatives market debacles, the 1997–98 Asian, Brazilian and Russian crises, Long Term Capital Management, the dot-com meltdown, etc. But those seeking a clearer view of the primary risks to their wealth today may need to use a shorter temporal focal length, because the financial landscape has changed dramatically—and in some fundamental ways—in just the past few years.

Use the year of the Russian default and the subsequent LTCM crisis—1998—as a benchmark. The market for credit derivatives (essentially tradable default insurance contracts) barely existed that year. By the middle of 2006, there were $26 trillion worth of credit derivatives outstanding. In 1998, it was still difficult for an individual with poor credit to get a home mortgage. But since 2000, subprime mortgages have proliferated, and, since 2002, investors have bought more than $2 trillion worth of bonds backed by them. In 1998, a troubled company looking to raise debt usually turned to the leveraged loan departments of big money-center banks, which charged exorbitant rates, required extensive collateral and imposed severe restrictions on further borrowing. Last year, hedge funds provided the majority of these loans, often with razor-thin margins, no covenants and minimal collateral.

The fallout from blowups has also changed dramatically. Thailand’s devaluation in 1997 precipitated the Asian financial crisis. Thailand suffered a coup in 2006—and world markets shrugged. LTCM’s $4.6 billion meltdown in 1998 raised the specter of a systemic financial crisis. Amaranth’s $6 billion in losses last September was greeted, apart from some regulatory jawboning, with a yawn. Enormous losses suffered by Vega Asset Management and Archeus Capital were also largely ignored by investors. The dreaded "C" word from 1998—contagion—never came up.

The reason these multibillion-dollar losses did not threaten a wider systemic crisis, according to Richard Bookstaber, a portfolio manager and former head of risk for Salomon Brothers and Morgan Stanley, is that LTCM borrowed—a lot—from the big money-center banks, and its losses therefore put the financial system’s core institutions in peril. Bookstaber, one of the participants in our roundtable about risks to wealth notes that today’s hedge funds get their liquidity from a wider variety of sources, and their demise does not therefore threaten our banking system.

The participants in this issue’s cover-story roundtable, including Ethan Berman, the head of one of Wall Street’s premier risk analytics firms, and leading economists James Glassman and Nouriel Roubini, acknowledge the profound changes in the financial firmament since the crises of the 1990s—differences that may have made it better able to withstand shocks such as the current housing woes and the predicted downturn in the credit cycle. But these changes also lower the value of decade-old precedents. As Berman notes, everyone already worries about housing and credit. "The problem lies in the word ‘surprise,’" he says. "A real risk is something that people are not expecting."

If we find ourselves preparing to fight the last financial war, how can we hope to identify novel threats in the future? Will the profusion of mortgages and mortgage-backed securities held by banks act as the fatal transmission mechanism between a housing crisis and the wider economy? Will the burgeoning credit derivatives market prove unable to withstand a severe market deterioration, and drag the money-center banks that trade these instruments down with it? Or will the strength of the economy and the efficiency of global capital flows offset sectoral or market problems and allow the financial system to adjust to crises? The first step to answering these questions is to drag them into the analytical sunlight, as we’ve hoped to do in this issue.