This piece by Justin Fox is among the best I’ve read recently. I highlight it not just because it is very good, but also because I don’t recall having seen it at my usual aggregation sites. All of it is well worth your time. A taste follows.
What is all this research teaching us? Mainly that financial markets are prone to instability. This instability is inherent in assessing an uncertain future, and isn’t necessarily a bad thing in itself. But when paired with lots of debt, it can lead to grave economic pain.
We all tend to forget — once the crisis du jour has passed and the raging bull reappears — that the markets are inherently unstable. Hedging risk is never a bad idea.
It is also worth being reminded (thanks, Justin) of the now-famous Raghuram Rajan presentation at the 2005 Federal Reserve Bank of Kansas City’s annual Jackson Hole conference. Rajan, a longtime University of Chicago finance professor who was then serving a stint as director of research at the International Monetary Fund and is now the head of India’s central bank, carefully warned that the world’s vastly expanded financial markets, though they have brought many benefits, might be bringing huge risks as well.