Credit Writedowns Fri 2009-10-23 09:00 EDT
The next crisis is already under way
Wolfgang Munchau of the Financial Times wrote a very important comment piece in today's Financial Times. In it he said that central banks are targeting asset prices to avoid the brunt of cyclical downturns. This policy is inducing asset bubbles and creating a more volatile real economy with unpredictable negative consequences...Munchau invokes Hyman Minsky's model of financial instability to help explain how this sets us up for a volatile future because traditional macroeconomic theory is inadequate for understanding what got us to this point. In essence, the idyllic state of economic and price stability we know as ``the Great Moderation'' is really just a financialization of the economy. However, a large financial sector leads to excessive dependence on asset prices to fuel growth, which in turn leads to an accumulation of debt...