Biggest IT outage in history expected to be a minor shock to the economy

Many companies are expected to report financial losses from the event, but it’s too early to tell what the ultimate outcome will be. Stocks fell Friday, with all three major indexes down nearly 1 percent. Shares of CrowdStrike, the cybersecurity firm at the center of the meltdown, took a particularly big hit, dropping more than 11 percent and wiping billions of dollars off the company’s value.

Still, experts said the incident is unlikely to have any clear economic ripples, at least not yet — a day of grounded flights, canceled operations and inaccessible bank accounts isn’t enough to derail the country’s robust growth. But they cautioned that the outage, caused by a botched CrowdStrike software update, has exposed the precarious state of an economy built on a handful of interconnected technological systems.

“This is global capitalism at work, and it’s a fundamental economic effect of the internet that we’ve built,” said Bruce Schneier, a security technologist and fellow at Harvard University’s Berkman Klein Center for Internet and Society. “We have a very fragile system where companies are rewarded for maximizing profitability. And how do you do that? By monopolizing, by eliminating inefficiencies, by running lean — and the thing is, it’s really great as long as it works. But when it fails, it fails terribly.”

The shock to the global economy comes just as many sectors are recovering from years of disruption caused by the pandemic, which has thrown supply chains into disarray and led to widespread shortages and price increases.

This week’s power outages shine a light on “what we’re already worried about”: a world and a global economy increasingly vulnerable to supply shocks, said Diane Swonk, chief economist at KPMG.

“That creates a world that is more susceptible to periods of inflation,” she added. “We saw it in the extreme — which we adapted to — in the pandemic.”

More directly, the disruption was caused by the closure of payment systems across the country. Customers reported that they could only pay in cash at supermarkets, gas stations and even zoos.

At Rojo Car Wash in Norwood, Mass., an employee said the credit card systems were down all day Friday, resulting in lost sales. “Cars see the ‘cash only’ sign and just drive right by,” she said. “It goes on like that all day long.”

While the incident is causing widespread concern in the economy, experts say it is unlikely to have any noticeable impact on the otherwise strong economy, which is characterized by a robust labor market and solid growth.

It won’t be a factor the Federal Reserve’s decisions to cut interest rates or revise the economic platforms of GOP and Democratic candidates. But it underscored the looming risks from outside the financial world that could quickly ripple through big industries and small businesses.

“We built a decentralized internet to withstand nuclear war, and yet what we weren’t prepared for is what we’re seeing now: a single point of failure that’s being felt all over the world,” said Tyler Moore, a professor of cybersecurity at the University of Tulsa. “We could be dealing with the effects of this for a long time, and the economic burden could be significant if that continues.”

In a February speech on “60 Minutes,” Fed Chairman Jerome H. Powell said the work of protecting and defending financial institutions is never done. He has often cited a major cyber threat as one of the things he worries could suddenly undermine the Fed’s mission.

“The forwards are constantly improving their game and the defenders have to constantly improve their game,” Powell said. “And you have to keep investing and keeping up or moving forward. That’s never going to stop. There’s never going to be a moment where you can take a breath and think, ‘Yeah, we’ve got this.'”

The Fed has a significant influence on the oversight and regulation of the U.S. financial system, and a spokesman said Friday morning that the Federal Reserve’s “critical” systems were functioning normally and that the central bank was cooperating with “affected companies and other government agencies” to assess the situation.

The outage’s impact also appeared minimal among Fed colleagues. Norway’s central bank said it had fixed some technical issues that were affecting liquidity operations, BNN Bloomberg reported, though it was unclear how much of that was related to the broader outages.

The New York Stock Exchange also functioned normally, although markets turned red after a week of losses.

Jeremy Kress, an expert on banking regulation at the University of Michigan, said the banking system appeared to be under control. But the sudden meltdown served as a reminder of the dangers of online failures. Kress pointed to a push among some regulators to increase the amount of capital banks must have on hand for cyber outages.

Others in the industry said that protecting the nation’s financial system from cyberattacks and other technical failures has been a top priority in recent years. This week’s meltdown, they said, underscores the need to be prepared not just for malicious attacks but also for mundane technical updates and other protocols that could inadvertently ripple through the industry.

“The question for the last few years has been, what do we do if we have a single point of failure?” said Jason Healey, a senior researcher at Columbia University who focuses on cyber conflict studies. “If we’re all sharing the same software and one thing breaks, it affects us all. That’s what we’re seeing here, and we need to be prepared so that these situations don’t take us off the cliff.”

Rohit Chopra, director of the Consumer Financial Protection Bureau, told CNBC Friday morning that there were no major problems with critical payments or banking services. But he said the country was getting “a taste” of what can happen when the financial sector and other major industries rely so heavily on a handful of cloud and technology companies. Chopra pointed to ransomware attacks in recent months that hit health care providers, auto dealerships and others.

“This is the type of situation that can really cause problems in the economy,” he said. “I’m hopeful that what we’re going to see today is more of an inconvenience than chaos. But of course, we’re just getting a taste of it.”