JUST BY the very nature of how the market is designed, you are going to end up having another crisis. —Richard Bookstaber

The same is true, though with a much longer timeframe, with housing. If for some reason interest rates go up and all of a sudden the housing sector softens, people will suddenly realize that their mortgages are going to cost them twice as much as their monthly paycheck and—by the way—their house isn’t worth what it was worth last year. Then you have a slow-motion cascade. People who were banking on the value of their houses as their savings for retirement have to dip into their stocks instead. Then you have everyone liquidating stocks, and that is a big problem. If the stock prices start to drop as a result of all the selling off, you have to liquidate even more.

Berman: But I don’t see housing and credit as being the problem, because they pass what we might call a "predictive stress test"; everyone is ready for the crisis and runs their stress scenarios to ensure they can survive those events. The problem lies in the word "surprise." A real risk is something that people are not expecting.

People have not, for instance, been running scenarios on what happens when oil prices unexpectedly go down to $30 a barrel. I pick oil, but it could be any of the commodities people have been investing in. How many people own oil that do not need it? A lot. A lot of investors have wealth that was created by the run-up in oil, and if oil falls, that wealth disappears. The same is true for companies. There is not a chance in the world that Exxon is prepared for $30 a barrel. Another development no one is expecting is a stronger U.S. dollar.

Worth: Is there any likelihood of a stronger dollar soon?

Bookstaber: Oh yes. It has nothing to do with the trade deficit. If I were God, I would have a stronger dollar, because developing countries need as much help as possible in speeding up their export growth.

Glassman: You have to ask yourself why central banks in other countries are buying dollars. Well, if you choose not to hold those dollars, your currency is going to rise against the dollar. Guess what that means if you’re China? If your currency rises, dollar-denominated companies such as Liz Claiborne and JPMorgan don’t want to invest in projects in China anymore. The Chinese know that a stable currency to the dollar is in their interest at this stage of their development. There will be a point when China won’t be buying U.S. Treasuries, but this is a development story, and it will take several decades.

Roubini: I think there are many good reasons why the Chinese, at some point, are going to stop holding dollars, and their currency is going to appreciate. The longer they wait and the more they accumulate reserves, the more an appreciation is going to cause a capital loss on their dollar reserves. If they have $1 trillion in U.S. dollar reserves, will they let their currency appreciate 20 percent and suffer a $200 billion loss?

The biggest risk is that the Chinese let the yuan appreciate rapidly, which would cause a dollar free fall. They are getting worried about their economy overheating. If they raise interest rates with their current exchange rate, they will be in trouble, because they will create an active investment bubble that eventually can lead to a hard landing. Therefore, it is in their own national interest to let their currency appreciate and slow down the rate in which they accumulate currency reserves.